Your credit score is a three digit number that is crucial to your financial life. This number is derived from data that begins when you open your first credit card or credit account. It is a score that simplifies the process of evaluating risk. Lenders use the number in order to speed up the approval process, and provide reassurance that you will pay back your loan. Credit numbers are not the only information used in the application process, but are a key factor. A credit score saves companies time and money by making it easier to qualify or disqualify an applicant. It helps companies manage their lending risks and provides them with easy to understand information about a borrowers financial life.
What Else is Your Credit Score Used For?
In addition to being used in loan applications, credit can also affect job prospects and access to housing. Companies will use this data to evaluate how responsible an applicant is. The insurance industry also uses credit numbers to determine the risk of an accident. A low score has been correlated to an increased risk of accidents and poor driving. In this respect, a bad score can cost you money in higher premiums. Currently over 70% of insurance companies use credit information to determine the price of a premium.
Accessing Your Credit Information
Due to the Fair Credit Reporting Act (or FCRA), all people in the U.S. now have the ability access to their credit. A free report from each of the three major credit bureaus can be accessed once per year, without cost. The site AnnualCreditReport.com gives citizens the ability to check their own reports. This site is run by the 3 major bureaus, Experian, Equifax, and Transunion. Another website, CreditKarma.com, allows access to this information through Transunion. It is also a compltely free way to check credit, but does not supply the same FICO number that most lenders use. Certain websites like FreeCreditScore.com supply a credit score, ONLY after a user has subscribed to a credit monitoring service.
What if You Have a Low Score?
If your score is poor, there are quite a few factors that may have gotten you there. Outstanding debts, late payments, defaults, and bankruptcies can wreak havoc on credit number. Fortunately, these scores are not static. They move up and down as new data is created by financial transactions. An event like a bankruptcy can seriously harm to your score, but with responsible payments and activity, you can significantly repair your score within a couple years.
Proactive steps like the use of a “credit builder loan”, can help you if you have no history or a poor score. This low interest loan is set up specifically for the purpose of building credit or increasing a bad number. A credit builder loan usually ranges from $300-$500 and is payed back over a period of 3-6 months. This borrowed money is placed in an interest bearing CD, while payments are made monthly. At the end of the period, the borrower receives the loan money back, plus interest. Successful management of a credit builder loan, will demonstrate a consumers ability to responsibly handle this credit.
Factors That Determine Your Credit Score
Components that make up your score include payment history, credit utilization, credit file age, type of credit used, and credit inquiries. These factors all contribute to make up your total score. The exact percentages used are trade secret kept by FICO, but an approximation is as follows:
Payment History – This part of your score is estimated to take up the largest percentage at 35%. It made from the history of payments to various accounts throughout your lifetime.
Credit Utilization – This is made from your ratio of available credit, to the amount used each month. It is estimated to count up to 30% of your score.
Credit File Age – Your file age counts for around 15% of your score. It is made from the length of time that you have had active credit accounts in good standing.
Type of Credit Used – FICO takes into account how many different types of credit you put into use. These different credit types account for around 10% and includes things like auto loans, credit cards, and mortgages.
Credit Inquiries -Inquiries generated by new credit applications can account for around 10%. Checking you own credit does not affect this metric.
Ross runs the website Great Credit Score. It focus on the economy, investing, personal finance, and DIY credit repair.