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Explaining Your Credit ScoreYour credit rating is a three-digit number that lenders use to determine whether or not you are worthy enough for them granting you a loan or line of credit to an individual.
Your credit rating is influenced by several factors, of which some you can control while other are completely out of your control. The three primary agencies that lenders use are TransUnion, Equifax, and Experian. These agencies keep track of your credit history by tracking your financial transactions such as when you make your payments and how much open lines of credit you have. This information is then used to tell the banks, employers, loan companies, as well as credit card companies if you have an adverse credit history. It is not unusual for a lender to acquire two or more reports. The reason for this is that it is very common for the details of your credit history to vary among the agencies. In order to calculate your credit score, the credit agencies use a formula known as FICO, which is named for the Fair Isaac Credit Organization, which began using credit ratings in the 1950s. The FICO score ranges from 300 to 850 and is linked to risk. If a consumer has a rating of 300, they are considered an extremely high risk, while someone with a rating of 900 will virtually have no risk to the loan company. To fully understand the FICO score and just how good or bad your credit is when compared to everyone else, approximately: 20% of the US population has a score above 780. 20% of the population have scores ranging from 745 to 780. 20% of the population has scores ranging from 690 to 744. 20% of the population has scores ranging from 620 to 689 and lastly only 20% of the population has scores below 620. Your FICO score is calculated from five different variables, which are:
Paying your accounts on time: This counts 35% of your score, and is considered the most significant factor banks look at when determining whether or not you are a good credit risk, the more problems in this area, the lower your score. Your payment credit history includes the number of times you were late making payments and the severity of each tardiness, the amount past due, and if the accounts were repaid. The amount and type of debt: How much and the type of debt you have counts 30% of your score and is the next important factor. This includes the total amount of debt you
owe mortgage, car payment, student loans, and credit cards, etc. The type of debt means whether the debt is long-term debt or revolving debt, which would include your credit cards. For revolving debt, you want to maintain a low balance in relationship to the amount of credit that is available. How long
you've been using credit: This counts for 15% of your credit score. Having accounts longer than 2 years will help to increase your
score providing that you've paid them on time. The variety of accounts: The different types of accounts you have counts 10% toward your score. Having several riskier types of credit will lower your score. This means having several revolving credit lines or finance-company loans will lower your score than someone who has a mortgage and student loans. The number and type of NEWLY opened accounts: How many recently opened accounts in the past 6 months count 10% of your score. The amount of new credit applications you fill out, as well as any increased credit limits that you request will affect your score. However, unsolicited pre-approved applications and pre-approved increased in credit limit will not affect your credit score. When you have the right information, you are able to make the right choices. Thirty-five years ago, when I was trying to establish credit, I had to have my father co-sign for a Sears credit card, simply because the banks at that time
wouldn't grant a college graduate credit if they
didn't already have credit. Times have truly changed. Though it can still be difficult to establish
credit the hard part is maintaining good credit
though its not impossible.
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