Three Important Figures: Why Your Credit Score Matters

You already heard the numbers: 690, 740, 805. Three simple digits that may seem mysterious, abstract, or both.

In the real world, however, your credit score largely determines what type and how much credit you can get, what interest rates you’ll pay – and sometimes, whether you’ll land in that great new job you want.

Do we already have your attention? Understanding how the big three credit reporting agencies (Experian, Equifax, and TransUnion) calculate your credit score is key to knowing how to proactively manage your credit and safeguard your all-important triple-digit credit score.

Your score allows businesses to assess their ability to repay the money they borrow. Check your credit score and try to improve it if necessary, are the keys to buying a new home.

Without effort there is no gain. Investing time now to understand your report and credit score will pay good dividends throughout your life.

Here’s what you need to know:

  • The big three credit reporting agencies focus primarily on what you owe and your payment history.
  • The most commonly used credit score (also called a FICO score) has a range of 300 to 850.
  • Rules can change — and in some cases have increased for mortgage lenders — about what is considered a good credit score.
  • There is consensus among experts that 720 is a good score. 740 or higher will often give you the lowest interest rates and the best terms.
  • Your score allows businesses to predict the odds that you will be 90 days behind on the loan repayment (or not pay) in the next two years.
  • Your FICO score is based on five factors, measured this way:
  • Your payment history: 35 percent of your score.
  • Amount of debt you owe: 30 percent of your score.
  • Extension of your credit history (usually the longer the better): 15 percent of your score.
  • Amount of new credit you apply for (many credit applications, especially in a relatively negative period): 10 percent of your score.
  • Types of credit you use: 10 percent of your score.

Mortgage lenders, auto loans, and credit cards use your score to see your ability to repay debt, based on your past credit history. Certain new credit models consider your income and work history. However, the old saying remains true: the best prediction of future behavior (in this case paying off debts without delay) is past behavior.

You may be thinking that it seems like giving you a credit score is about ranking you and even judging you. While there is some truth to this, credit scores benefit us as consumers, and importantly:

  • Fast credit approval – Powerful computer networks convert a credit score and provide an answer for an auto loan or department store credit card in minutes, saving you time.
  • Fairness – computers seem impersonal, but they can be good since they treat everyone equally. Race, religion or gender are not considered factors. Only your credit history.
  • Consistent – We are all evaluated by the same formulas and rules.
  • Lower prices – When businesses reduce their bad debt, consumers typically pay lower prices.
  • How to check your credit:
  • Consumers are entitled to a free credit report every 12 months.
  • The three credit reporting agencies maintain the http://AnnualCreditReport.com website for this purpose. Use. Be wary of others.
  • Your credit report contains detailed information. You need to look for the errors and correct them.
  • Your current credit score may cost like $10, but it’s worth the investment.

Steps you can take to improve your credit score over time:

  • Pay your debts without default.
  • Reduce your debt.
  • Find and correct errors on your credit report.
  • If you have delinquent debt, pay it off and ask that the debt be marked as paid on your credit report.
  • Be patient. None of these stages are immediate. However, experts agree that they will work over time.

Now that you understand your credit score, do you probably want to talk about your SAT score, cholesterol level, or weight? Of course not. However, by understanding your new credit score and the previous stages, chances are you’ll get a new home, car, or job wanted, without a credit score standing in your way.

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By Catharine Bwana