Understanding Your Credit Score

Much weight is given to your credit score by lenders. So it is in your best interest to get your credit score as high as it can possibly be before you submit any credit application.

Not all lenders are the same. Some lenders will base your creditworthiness solely on your credit score while others consider a few other factors.

Such as how long you have lived at your current residence, length of time at your current job or if you have both a checking and savings account to name just a few.

However, the credit score is only the starting point. A low credit score will tell the lender if it is worth moving forward with the credit application process or if it is best to quickly show you the door and move on to the next guy.

A low credit score may also serve as an indicator to unscrupulous lenders. Many people with a low score are desperate and are willing to pay any interest no matter how high.

Though there is no exact formula known to evaluating a credit score, there are some basic guidelines. The following should help you understand what goes into determining your credit score.

Payment History:

More than 30 percent of your credit score depends on whether you pay your bills on time. One late payment can severely ding your credit score. Many times when we are figuring out our monthly bills we tend to make the innocent mistake of believing that a $20 dollar late payment is not too important. Let me say this, a late payment is a late payment, no matter how small it may be. So the next time you say to yourself ‘Oh this payment can wait’, think again.

Balance Owed on Accounts:

Another large portion of the credit score, also as much as 30 percent, is impacted by the amount of money that is owed to creditors. The more money that is owed to your creditors simply means that you have less expendable income. To change this factor, you must increase your verifiable income or reduce your debt.

Length of Credit History:

Lenders want to see a good long solid track record of on time payments. Most times the actual lender that approves your loan or line of credit will never see you face to face. Therefore, the only method available to them of judging your character is by reviewing your credit history. The longer the credit history the more information they have to make a better judgment of your creditworthiness. Most lenders base a good 15 percent of your credit score on this factor.

New Credit:

Opening new lines of credit in a short period of time can have a negative impact on your credit as lenders may see this as a sign of urgency and desperation on the part of the borrower. Be careful here. If you are constantly searching for that low interest credit card rate and frequently transferring balances to new credit cards, this may save a few bucks in interest but may ding your credit score even further. On average, 10 percent of your credit score is based on the amount of new credit.

Type of Credit:

Most types of credit fall into two categories, Revolving Credit and Installment Loans. Credit cards are good examples of revolving credit, as these types of credit lines do not have a fixed number of payments. An auto loan or home mortgages are good examples of installment loans because when you make a set number of payments, the loan is finished. Lenders will evaluate how you handle both types of credit.

So how do you measure up? Considering the above factors should shed some light on understanding your credit score.

By understanding what goes into a credit score should serve as a guide to help you raise your credit score. The thing to remember here is that a low credit score is not irreversible.

Take the appropriate action today to improve your credit score.

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