Confused About Credit Scoring

Category: Finance, Credit.

Confused about credit scoring?

If you answered yes to any of these questions, take a deep breath. Frustrated by the so- called calculations that the bureaus use to calculate credit scores? You are not alone! These types of loans frequently come with very high interest rates and exorbitant fees that can end up costing consumers much more than the original purchase. When it comes to money lending, most financial institutions strive to live by maxim of only good credit need apply. Yes, there are lending institutions that will lend to individuals or businesses with very low credit scores( known as bad credit loans ), but these loans often come at a high price. Even if your credit score is not necessarily bad, but just so- so , chances are you ll end up paying a lot more than a person with very good credit.

Good credit is based on your credit report and the accompanying three- digit FICO credit score. So what exactly do lending institutions consider good credit? Your FICO credit score is based on a number of factors, including: 1) New or recent credit history. This includes any new credit accounts you may have opened, whether you ve made requests for new credit, and how you ve recently managed all of your credit. The first factor used to calculate your credit score has to do with your recent credit history. If you decide to open several new accounts at once, be warned that this may hurt your credit score. This includes whether you have missed any payments, or paid late.

A person with good credit most likely does not open new accounts frequently, but rather has a long history with a few accounts that are in good standing. 2) Your payment history. Payment history also involves the different types of payments( car, different credit cards, house, etc. ) you make each month. A person with good credit probably has a consistent record of paying on time each month over a long period of time, with little or no missed payments. 3) The length of your credit history. Roughly 35% of your credit score is determined by your payment history. This refers to whether you have established sufficient history to provide an accurate portrait of how you manage your finances. Keep in mind that even if you have managed your credit perfectly, if your account is only a year old, it probably won t raise your credit score immediately. Lending institutions want to know whether you have a history of paying on time.

Keep it up for a few years, and watch your, however credit score soar. 4) The amount you owe on all your different accounts. Are most of your credit card accounts maxed out? Do you have dozens of accounts carrying high balances? Or can most of your debt be traced to one or two accounts, such as your mortgage and car payments? A person with good credit probably only carries balances on one or two accounts. 5) Types of credit. Good credit is hard to attain if you carry balances on many different accounts. Another factor used in calculating your credit score involves the types of credit you use.

If the type of credit you most commonly use weighs heavily on credit cards and other high- interest credit sources, your credit score will probably suffer. Different kinds of credit include credit cards, and installment loans, mortgages such as car and student loan payments. Now that you have an idea of what good credit looks like, how can you improve your chances of getting a loan if your credit is less than stellar? Your report is available from any of the three major credit reporting bureaus- Experian, and TransUnion, Equifax. First, obtain a copy of your credit report. By law, you can obtain a free copy of your credit report once a year, but additional copies will cost you approximately$ 1Review your credit report carefully and contact the credit bureau if you spot any errors or omissions( be prepared to provide documentation) . The importance of paying your bills on time, cannot be stressed, every month enough.

Remember that so much of your credit score depends on your payment history. Many banks offer you the option of scheduling automatic payments each month. Also, don t open new credit accounts if you don t intend to use them, and don t open and close accounts frequently. Make use of these, if your financial situation allows. Instead, focus on using responsibly the accounts you already have. This alone will raise your credit score, and make you much more likely to get best loans from lending institutions.

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