Credit Card Guide
What is a Credit Score?
Credit Scores as a Basis of Credit Worthiness. How does a three digit number affect your life? Your credit score is one of the single most important numbers that you can keep track of. In fact, how much money you save in a lifetime may very well depend on how well you take care of your credit score.
The score is a snapshot of your credit risk at any given point in time. Lenders wanting to know whether they can extend you credit and on what terms should that credit be extended, can make a decision by taking a look at this number. Your mortgage, your insurance premiums, your student, and car loans — everything is connected to this number.
Credit Score Basics
Three major credit reporting agencies in the United States collect and collate information on millions of consumers every day. This information is reported by the lenders who tell the agencies how much credit was extended to a consumer, how long this credit has been used by the consumer and how much the consumer has paid back. Your credit worthiness is determined when all this information is put together and a credit score is arrived at through a mathematical equation.
The Fair Isaac Corporation is a company based in California that designed the software which is used to calculate credit scores. The exact formula used to calculate this score is protected by the Federal Trade Commission. The credit score (also known as the FICO score) is what most lenders use to determine your credit risk.
The range for credit score extends from 300 (the lowest) to 850 (the highest). The score is calculated using information collated from five categories:
- Payment History
- Amount of Debt Owed
- Types of Credit Used
- New Credit
- Length of Credit History
The higher your score, the lower your credit risk and the lesser interest you will pay. This is the general rule of thumb when it comes to credit scores.
More Than One Credit Score
The three major credit reporting agencies in the United States are TransUnion, Equifax and Experien. Each of them calculates your credit score based on the information they receive from the lenders. It is possible that each bureau has its own credit score when it comes to their credit reports. This is because not all lenders report the borrowing activities of a consumer to each of the credit reporting bureaus.
Although the FICO score is a good estimate of your credit score at any given point, each agency might have a different score because the information they have differs. When you or a lender gets a credit report from an agency, it comes with four "score reason codes." These codes explain the top reasons for the credit score and help consumers to locate errors and determine how to improve on their scores.
Get to Know Your Credit Score
Getting to know your credit score is one of the best things you can do for yourself. A new ruling under the Fair and Accurate Credit Transactions Act allows all consumers to obtain one free copy of their credit report from each credit bureau every year.
It is important to get to know your credit score from these reports because getting any errors on the credit reports fixed is the responsibility of the consumer. Credit bureaus report what lenders tell them. The Fair Credit Reporting Act has ensures that there are standard procedures that can be followed to get rid of any mistakes on your credit report.
Raising Your Credit Score
There are no quick fixes to raising credit scores. The best thing that anybody can do is to manage credit responsibly over a period of time. Some things you can do to raise the score are:
- Pay all bills on time
- Make more than minimum payments on credit cards
- Use credit judiciously, never apply for more credit than necessary
- Check credit reports every year
- Identify and fix any errors in the credit reports
- Maintain and use credit accounts over a period of time
- Keep balances low on credit cards (try to spend only 30% of your credit limit)
- Pay off debt rather than move it around
- Negotiate with creditors if you have trouble staying current on payments
Remember, a credit score is a snapshot of your credit risk at that point in time. It is not the end all when it comes to your credit receiving ability. You can change your credit score and use credit wisely to maximize your advantage.
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Credit Card FAQ
- Why Should I Sign the Back of my Credit Card?
- Who Can Pull CRA Reports and From Where?
- Can Credit Card Companies Garnish My Wages?
- Do I Have to Pay off my Credit Card Debt in Full Every Month?
- How Do I Negotiate With Credit Card Companies?
- More at: Credit Card FAQ