Credit ScoresWhen lenders decide whether or not to give you a loan or extend credit, they look at your credit score. Your credit score is a number evaluation that lenders use to gauge credit worthiness. Your credit score can affect your credit limit, loan amount, interest rate, and loan terms.
Your credit score is very closely related to your credit report. In fact, your credit score is a quick, scanable evaluation of your credit report that helps lenders determine whether they will work with you or not.
Origins of Your Credit ScoreThere are three companies that collect credit information on you. These include Equifax, Experian, and TransUnion. Everything from account payment history to job information gets recorded. But they all do not use the same method for assessing your credit report and assigning you a credit score.
Because of this, there is a gap in lenders being able to assess your credit worthiness. myFICO is a company that has stepped in to standardize stores. These standardized scores are called FICO® credit scores. The majority of lenders use these scores to determine whether or not they will do business with you.
Credit Score FactorsThe following are factors are commonly used to determine your credit score:
Credit HistoryLenders look at how long you have had credit and the general status of those credit lines. If you want a higher credit score, have a long history of accounts in good standing.
InquiresYou, along with lenders, can access your credit reports to gauge credit worthiness. Too many inquiries by lenders in a short amount of time can hurt your credit score.
New AccountsNew accounts are red flags to lenders and can affect your credit score — especially when you are applying for credit or a loan. Generally refrain from opening new accounts if you know you will be going to a lender in the near future.
Outstanding CreditWhat you owe can have an affect on your credit score. If you owe a significant amount to lenders, it will be harder to secure a new loan or new credit.
Payment HistoryLenders do not like to take risks. If you have a history of late payments, expect to see a lower credit score.
Pre-existing AccountsYour overall credit potential can also affect your credit score. Open accounts, regardless of whether you are using them or not, are looked at when assessing how much additional credit you can secure.
Running the NumbersIt is important to note that your credit score may be up to 50 points different from company to company. Typical scores are between 600 and 750, with the overall range usually falling between 350 and 850. You want the highest score you can get to secure the most favorable credit or loan.
If you have a score of 650 or above, you can expect a favorable "prime" interest rate. If your score is between 620 and 650, you are considered more of a credit risk, but still qualify for a good loan. You will most likely have to provide further documentation to secure the loan however. Finally, if your score is below 620, you may qualify for a smaller loan than you anticipated, with a less than desirable "subprime" interest rate. The difference of just a few percentage points in your rate translates into several thousand dollars over the length of the loan. This money goes into lenders pockets instead of your own—negatively affecting your purchasing power.
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