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credit score is a number based on the statistical analysis of a consumer’s credit reports, usually between 300 and 850. A good credit score is considered to be between 680 to 740. Any score above 750 is excellent.
The average credit score is 678. The higher a credit score, the more likely a consumer will be approved for credit and the interest rates will be lower.
In 2008 banks and creditors tightened their underwriting standards and now, more than ever, is time to know where you stand and keep an eye on your credit score with Equifax ScoreWatch™
Why Credit Scores Are Important
Credit scores are used by lenders and credit card companies to predict if you will be timely in your payments and if you will pay your loan off. Most lenders now use your credit score as the number one determinant in granting credit.
It is imperative you know your credit scores before applying for any credit. Since everyone else seems to know your credit score, you must be familiar with it also. Don’t be the last to know.
Credit scores are often used to determine your “credit worthiness” by the following: (1) Credit Card Issuers; (2) Telephone Companies; (3) Insurance Companies; (4) Cell Phone Providers; (5) Cable Companies; (6) Landlords; (7) Utility Companies; (8) Employers; and (9) Some Banks when you open a checking account.
The three major credit bureaus do not always use the same scoring models. This is why a consumer will have a different credit score for each bureau. Check your credit score online for fastest results.
Many financial advisors believe you only have to check your credit reports and scores twice a year. This is not enough. Credit scores can change daily as new data and bill payment habits are reported by your creditors. The amount of debt you carry and any new credit you apply for is monitored 24 hours a day.
What Determines Your Credit Score
While credit scoring companies such as Fair Isaac Corporation (FICO) will not reveal exactly how credit scores are computed, there are a five major factors which measure into the computation process. No one piece of information by itself determines your score.
Payment History (35% of your score)
- Information from lenders, banks, credit card issuers, department store accounts, car loans, finance companies, mortgages, etc., about how timely you make payments.
- Accounts in collection or past due.
- Information in public records, such as bankruptcy, judgments, liens, wage garnishments, or child support orders.
- Basically how timely you pay your bills, especially recent information is heavily weighted.
Amount of Debt Owed (30% of your score)
- How much you owe on all your accounts.
- How much credit you have available to use.
- As a rule you should only use 30% of your available credit.
- If you need to raise your scores quickly try paying down your balances to 30% of your available credit limit. The good thing about paying down your credit account to increase your scores is that it works whether the account balance is $5000 or $500.
Length of Credit History (15% of your score)
- How long ago you opened and used your accounts.
- How recently you applied for new credit.
- Recent good credit history following past payment problems.
- Never close old accounts. Closing old accounts deducts from your “length of credit history” and lenders always look at how long you have utilized credit. The older the credit account, the better the score.
Types of Credit (10% of your score)
- The different types credit accounts you have.
- The total number of accounts you have.
- Your mix of credit should include a mortgage, unsecured credit and revolving credit.
New Credit (10% of your score)
- Limit the number of credit applications you filled out.
- Applying for lots of credit will bring your score down. Lenders may interpret your applying for lots of credit as a sign that you are experiencing financial difficulties.
All of these factors determine your credit score. Points are awarded or deducted for each factor. A score of 720 out of a possible 850 is considered a good credit score. The best interest rates are afforded to consumers with credit scores of 750 and above.
