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Your credit score is one of the most important financial instruments in your life. Having a good credit score can save you thousands of dollars in interest payments. So what exactly is a credit score and how does it affect you?
Your FICO score is a summary of your credit worthiness. FICO stands for Fair Isaac Corp., the company that developed the system. Your FICO score is supposed to be a translation of what is on your credit report. It's an easy way to see how good you are at paying debts without delving into all of the details
. The lenders can get an accurate estimate of how big of a risk you are and can easily determine how likely they are to get back money if they loaned to you. Scores can range from mid 300's (bad credit) to 850 (great credit).
What goes into a credit score?
Paying your bills on time 35%: This portion of your credit report is the biggest part. Paying your bills and making payments on time is the biggest factor that goes into a credit score. So it's important to not miss a payment or be late.
Outstanding Debt 30%: How much outstanding debt do you have? The money owed on different types of accounts (revolving and installment) are each weighed differently but both affect your credit score. How many of the accounts have a balance? Is it small or big? The smaller the better and of course the less accounts that have balances the better.
Length of Credit History 15%: Usually the longer you've had a credit history the higher your score will be. Even though you may just be starting out with credit it is possible your score can still be high as there are some factors that could work in your favor. How long has a specific account been open? The longer the better, which is why it's always a wise decision to keep one of your first credit card accounts open.
How many accounts and what types of accounts do you have? 10%: The FICO score takes into account what type of accounts you have: revolving (credit cards), and installment (personal loans, car loans and mortgage loans). The score looks at the mixture of your accounts and is weighted relative to your credit history depending on what other information is available for the FICO calculation. So if you don't have much credit history, than this is weighted more, whereas if you have a lot of credit history this is weighted differently.
Why is it important to know your credit score?
Knowing your credit score enables you to understand how a lender will view you when you apply for a loan. If you have a low score you will probably need to improve it before you can get a loan. If you are applying for a mortgage loan and let's say you have a 780 FICO score, you know that you should be getting the best rate available on the market place. If a lender is trying to give you a higher rate they could be trying to take advantage of you. If this happens I would question the lenders trustworthiness and continue to shop around.
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