Why do some people get offers for pre-approved credit cards
and others don’t? What do car dealers know about your financial health that you
don’t know? The answer is your credit score.
Your credit score is a number generated by a mathematical
formula to estimate how likely you are to pay your bills. Based on the
information in your credit reports from the three credit bureaus, Equifax,
Experian, and TransUnion, your credit score has been a factor in your ability
to qualify for loans and good interest rates for more than twenty years.
Lenders compare your credit report with millions of others to determine your
score.
While there are a variety of credit scoring methods
available to lenders, the most widely used is the FICO score. Based on a
scoring system developed by Fair, Isaac & Co., FICO scores range from
approximately 300 to 800 points and are provided to lenders by the three credit
bureaus. You also have access to your FICO scores but will be charged a fee by
each credit agency providing your report.
According to Fair Isaac, the credit scores of the American
public are divided as follows:
• 499 and below 1 percent
• 500-549 5 percent
• 550-599 7 percent
• 600-649 11 percent
• 650-699 16 percent
• 700-749 20 percent
• 749-799 29 percent
• 800 and above 11 percent
A score of 720 or higher will probably get you the best
interest rates on a home mortgage. Your credit card company looks at your
credit score to decide whether or not to raise your credit limit or charge you
a higher interest rate. The higher your credit score, the better you look to
lenders and the lower your interest rates.
Several factors affect your credit score including your
payment history, the length of your credit history, any outstanding debt, how
long and how often you’ve had derogatory credit information, such as
bankruptcies, charge-offs, or collections, and the amount of credit you are
using compared to the amount of credit available to you.
So how do you raise your credit score? Well, the first thing
to do is to order a copy of your credit report with the score included from
each of the three credit bureaus. Review your reports and note any
discrepancies. Correcting blatant errors is the first step to repairing your
credit, and changes can take up to three months to be recorded.
Next, remember to pay your bills on time. It may seem like a
small thing at the time you’re writing that monthly check, but an accumulation
of timely payments says a lot to a potential lender looking for a reliable
client. Prompt payments in the last few months can actually make a big
difference in your credit score.
While collections, bankruptcies, and late payments have the
greatest negative effect on your credit score, your debt is a factor as well.
Keeping your account balances between 25% and 50% of your available credit
signals a responsible borrower. For example, if you have a credit card with a
$2000 limit, keep your debt below $1000. For this reason, consolidating your
credit card debt can actually lower your credit score, as it raises the ratio
of your debt to your available credit. The best solution is to simply pay off
your existing cards as quickly as possible.
Excessive inquiries over a short period of time also damage
your score. When lenders, banks, or credit card companies check your credit
report, the inquiries are recorded. Several of these “hard inquiries” in the
same time period may signal to other lenders that you are opening multiple accounts
due to financial difficulty.
If you discover that you have accounts on your report that
you didn’t open or your public records such as tax liens or judgments that are
not yours, you may be a victim of identity fraud. It is up to you to deal with
the damage that can happen to your credit score because of this criminal
activity. Being aware is your first step, but when the items end up on your
report, you have no alternative but to clean it up.
Overall, give yourself time to build a good credit score and
even more time to correct serious problems. The length of your credit history
is another determining factor in a good score. Lenders want to know that you
are able to maintain prompt payments and good standing for a period of time.
So, check your reports yearly, do your due diligence, and your score can
improve.
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