Don’t Underestimate The Importance of Your Credit Score.
Your credit score is an important measure of your financial well being that will follow you throughout your entire lifetime.
What Are Credit Scores Used For?
This score is used by lenders and creditors, landlords and even employers. Your credit score is used to determine whether you may be a good risk for certain types of credit approval, be it a loan to purchase a home, an automobile, obtain a credit card, rent an apartment or any of a number of other situations which require validation of your credit worthiness.
What is Your “Credit Score”?
Your credit score is determined by a number of factors which are essentially plugged into an algorithm. It is designed to be a numerical representation of your credit history that will allow the decision makers to quickly determine what your overall risk is financially. It is based on an exclusive statistical model and is generally based on what is contained in your credit reports from the three major credit reporting bureaus.
It is vital that you attain the highest score possible, especially considering how much of your life can be affected by good or bad credit. An example of this is that according to the Fair Issac Corporation (FICO) a difference of only 100 points can cost consumers up to $40,000 in increased interest on a $300,000 home loan over the life of a 30-year loan. This makes it crucial to improve a low score before applying for a loan.
It should be noted, that because of the relationship between your FICO score and your credit reports, any mistake on a report can potentially affect your credit score in a detrimental way. So, before allowing a lender to pull a copy of your credit reports you should utilize your right to your annual free credit reports from all three major bureaus to see your reports and check for any incorrect and/or outdated information.
Many sites claim to offer free credit reports, but many times this is only one report from one of the credit bureaus, and you may be required to sign up for a monthly credit reporting service before you can get your free report.
What Exactly is a Credit Check?
A credit check typically refers to one of the following three things;
- A basic check of your credit score by someone considering granting you credit. Each of these inquiries is considered a Hard Inquiry and will deduct several points from your credit score. Applying for more than one account in a 45-day period can deduct quite a few points and negatively affect your credit score.
- A check of the accuracy of your various credit files. This is normally an audit done either by you or by a Debt Settlement or Credit Repair company hired by you.
- A basic check confirming your credit standing via queries from existing creditors as well as other companies who may be considering soliciting you as a new customer. These inquiries are considered Soft Inquiries and will not deduct points from your score.
Making sure your credit report is accurate at all times is vitally important and something you should be doing regularly. This gives you the time and opportunity to correct any issues you might come across on your major credit reports. It’s also important for identity theft protection.
Determining Your Credit Score:
It’s important to remember that everyone has 3 different credit scores. Most consumers are under the false impression that they have one single score or that which score is being used doesn’t make a difference.
Each of the credit reporting bureaus utilizes different facts about you in determining your credit score. Therefore, the result is varying credit scores from each of the bureaus. You may very well have a 700 rating from one credit bureau, while another bureau has compiled their results using different variables and your score with that credit bureau may be only 650.
Whenever you are considering making a major purchase, like a new home or a new car, it is in your best interest to order your credit reports well in advance from each of the 3 major bureaus. Allow yourself plenty of time to scrutinize your reports very carefully and dispute any discrepancies.
Factors That Determine a Credit Score:
What factors are taken into consideration when determining credit scores? Each score is based on different variables and information, but there are some general guidelines you can consider.
- Your Payment History? – 35%
- Your Total Indebtedness? – 30%
- Length of Credit History? – 15%
- Type of Credit? – 10%
- New Credit? – 10%