Ever wonder just how
far-reaching your credit score really is? The short
answer: very. Your FICO credit score affects nearly
all of your financial dealings, from the annual percentage
rate that you pay on your credit card to whether you
are able to purchase a cell phone.
Your credit score is of particular interest to lending
institutions. Nearly 75 percent of all lenders assess
your credit score when determining whether to grant
a loan. If you plan on ever buying a house and car,
or purchasing car or homeowner’s insurance, expect
lenders to examine your credit score very carefully.
A bad credit score will make most lenders think twice—they
don’t want to lend to individuals who appear to
be a risky proposition. A bad credit score could keep
you from getting that dream house or purchasing a new
car, and could even threaten the possibility of getting
a job. So what’s the easiest way to ensure that
you’ll be approved for a loan? Become familiar
with your credit report and score. The more you learn
about your credit score, the less likely you’ll
be of becoming a risky proposition.
Why all the fuss over a simple three-digit number?
Examining how your FICO credit score is calculated may
provide insight into why some lenders may choose to
deny your loan application. Your FICO score (FICO, by
the way, stands for Fair Isaac Company—the institution
that created and compiles the score) is calculated using
several data pulled from your financial records. These
include: the number and types of credit cards you use,
your payment history, the amount of money you owe, the
number of years you’ve had a history on file,
and whether you have any new credit.
Which of these things carries the most weight in determining
your credit score? Approximately 35% of your credit
score is determined by your payment history. Your payment
history refers to a number of factors, including the
different types of payments you regularly make (examples
of payments include standard major credit cards, department
store credit cards, mortgages, and car loans), and whether
you have missed or paid late on any payments. Included
in your payment history is information regarding any
bankruptcies, liens, judgments, foreclosures, wage garnishments,
or law suits that have been recorded. If your payment
history reflects that you don’t have much debt
and usually pay your bills on time, you can expect your
credit score to reach into the upper brackets. Conversely,
if your payment history reflects a pattern of missed
or late payments, and you have a significant amount
of outstanding debt, you can expect your credit score
to be much lower.
Another large chunk of your credit score is determined
by the total amount of debt you carry. This includes
all the amounts you owe on different credit card accounts,
as well as installment payments such as car or student
loans. Also of importance is the different kind of debt
you carry, such as credit card debt versus mortgage
and car loan payments. If you carry a lot of debt on
a high-interest, long-standing credit card account,
you can expect this scenario to hurt your credit score
significantly. Another scenario, however, could have
a much different effect on your credit score. For instance,
an individual who pays a lot, mostly due to their mortgage
payment, will likely have a higher credit score than
a person who pays a lot because of debt on their credit
card.
Now that you have a better idea of how your credit
score is calculated, you can understand why lending
institutions may be wary in lending to individuals or
small business with a low credit score. Lenders can
interpret a low credit score to mean that you have a
high amount of outstanding debt and a history of missing
payments (or both). Unfortunately, even if you are approved
for a loan, chances are that a low credit score will
saddle you with very high interest rates. Before you
approach a lender, be certain you know your credit score.
This gives you the opportunity to clear up any discrepancies
or inaccuracies that may be on your credit report before
your score is scrutinized by lenders.
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