Archive for November, 2009

Understanding Your Credit Score

Thursday, November 12th, 2009

Why should you care about your credit score? Because a bad score costs you money. Credit scores are also increasingly being used for assessments by many companies outside the financial world including utility companies, mobile services, and insurance groups. Your credit score is the only rating that follows you throughout your life. Grades become unimportant once you graduate, but a credit score is – if not forever – a long term proposition.

Your credit score is a three digit number from 350 – 850. The score is a summary of all the factors in your credit report and reflects your overall credit worthiness. It tells a lender how likely you are to pay back a loan. For a fee, the credit bureaus provide your credit scores to interested lenders. You can also order them yourself.

Here are the main factors which go into your score along with their approximate weight.

People have more control than they think over their credit score because it is behavior based. You control how you pay your bills – on time or not. You are in charge of whether you open new credit accounts and so on. It’s a good idea for young adults to open an account to begin their credit history but they should approach credit with caution – many responsible young people have become overwhelmed by the purchasing power of credit and have gotten into debt.

It’s a good idea to have several different types of credit so lenders have an indication of how you handle various accounts. A mortgage, car loan, store account and major credit card are a good mix.

Things that credit score does not consider:

  • Age
  • Income
  • Race, religion, marital status
  • Interest charged on accounts
  • Zip code/address

What does your score mean?

  • 750-850 Excellent credit – you’ll get any loan with the very best terms
  • 700-749 Very good – you qualify for highly competitive interest rates
  • 650-699 Good credit
  • 600-650 Fair
  • 550-600 Poor

The good news is that 60% of Americans have credit scores above 700 – chances are you do, too.

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