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| More rates and news from Credit Scores Can Be Confusing
(Credit scores can be a baffling yet very important part of every person’s financial life.)
If you have never checked your credit score or do not even know what one is then you should definitely find out.
Don’t be alarmed, even the savviest consumers can have trouble understanding their credit score.
Just doing a little research and reading some articles will help you to gain a better understanding of your credit score and the importance of the number.
A December 8, 2006 article by Quickenloans.com, “What is a credit score and why is it so important,” discusses some things that every consumer should know about their credit score.
Let’s begin with the basics:
“When applying for credit, lenders will check your credit score to see how good it is. But what exactly is a credit score; how is it calculated; and why is this number so darned important?”
“A credit score is a number that strongly indicates to lenders and creditors how likely you are to pay back the debt you owe, based on your past borrowing behavior. The higher your score, the more likely you are, in their eyes, that you will pay back the money you borrow.”
Your credit score and the chance that you get approved for a loan with the most favorable conditions go hand in hand.
This means that lenders will give better interest rates and terms to those with higher credit scores. So the higher your number, the better.
“Your credit score is used to determine whether you can get credit for things like: a credit card, a loan to finance your college tuition, a loan to buy a house or car, or even to start up a new business. Not only that, it is used to determine what kind of loan you qualify for, how much credit you qualify for and what your interest rate will be.”
Now, when you get your credit score be sure that you get your FICO score, since this is the number that most lenders use.
“FICO is short for Fair Isaac Corporation and is considered by many to be the most accurate. The three major credit reporting agencies, Equifax, TransUnion and Experian also calculate credit scores based on their own statistical model.”
Credit scores range from about 300 to 900; the average score in America is 740.
So now that you know a little bit more about credit scores, you may be wondering how a credit score is calculated and if you have a low one, how to improve it. FICO gives an approximate breakdown of how they determine a score:
“Timeliness of payments = 35%. The amount of revolving debt in relation to the amount of your total revolving credit = 30%. Length of credit history = 15%. Type of credit used (installment, revolving, consumer finance) = 10%. Amount of credit recently obtained and recent searches for credit = 10%.”
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