The Real Deal on Credit: What's the Score?
The title of this post is not alluding to the game that is on tonight, even though it is NBA Playoff season. If someone asked you what are the most important numbers you need to know in life, what would you expect most people to say? Social Security number, phone number, debit card pin number perhaps? While all of these are very important, none will have as much impact on your life as your credit score. Your social security number, while very important to know and protect, won't change and is given to a born or naturalized citizen of the US. Your phone number is important for people to stay in contact, but it can change as well as the pin number to your debit card. However, your credit score can affect you positively or negatively when it comes to buying a house, renting a car, or buying furniture and for the most part you can control how good or bad it is. It can even be used to screen you for a job. In many cases if you have bad credit...NO J-O-B for you! So what exactly is a credit score and how can it be good or bad?
A credit score also known as a FICO score is a three digit number that can range from 350 to 850, 350 being the absolute bottom of the scale and the worst credit score and 850 being an ideal borrower with amazing credit. Lenders use this three digit number to make decisions on how much they are going to lend you and at what interest rate. Now what makes up this score:
1) Past Credit Experience - 35%
This is basically how good have you been with credit in the past. Did you pay your bills on time? Did you not rack up a lot of debt in the past and have a lot to pay back? The largest part of your credit score is based on how you handled credit in the past.
2) Current Credit Experience - 30 %
The second largest part of your credit score is based on how you are managing credit now. If you are paying bills on time, not maxing out credit cards, and have an overall healthy experience you will have a better score. Already 65% of your credit score is based on how well you manage your credit and debts in the past and now.
3) Length of Credit - 15%
Next, your credit score is based on the length of your credit history. The longer credit history you have the more reliable and trustworthy you look to lenders. I look at this as your long-term credit reputation. If lenders can see you've had a long healthy relationship with credit they will be more likely to loan you money at the best rates. Keeping older accounts open is important for this factor.
4) Types - 15%
What types of credit do you have? Someone who has a mortgage, two credit cards, and a student loan will look more attractive to a lender than someone who just has one credit card open assuming that the first person is meeting their obligations. This is something you tend to build over time. Don't go out and open 4 credit cards at one time, but always be looking to diversify the types of credit you have.
5) Pursuit - 5%
This last and very small part of the puzzle is based on what credit you are constantly seeking. Lenders want to see that you aren't just sitting on the credit you have, but that you are also looking to acquire credit in the future. In my opinion this is almost a negligible piece to the puzzle. Focusing on your past and current credit experience coupled with the accounts you have and how long they've been open is way more important than the credit you are looking at next.
If you are interested in finding out what your credit score is, you can use this MSN Tool to estimate your credit score. Or, if you want an official document explaining your credit score, you can get your score for free from My FICO.
In the next post, we will look at things that can hurt your credit history and score. Also we can address how bad credit can cost you in the long run.
A credit score also known as a FICO score is a three digit number that can range from 350 to 850, 350 being the absolute bottom of the scale and the worst credit score and 850 being an ideal borrower with amazing credit. Lenders use this three digit number to make decisions on how much they are going to lend you and at what interest rate. Now what makes up this score:
1) Past Credit Experience - 35%
This is basically how good have you been with credit in the past. Did you pay your bills on time? Did you not rack up a lot of debt in the past and have a lot to pay back? The largest part of your credit score is based on how you handled credit in the past.
2) Current Credit Experience - 30 %
The second largest part of your credit score is based on how you are managing credit now. If you are paying bills on time, not maxing out credit cards, and have an overall healthy experience you will have a better score. Already 65% of your credit score is based on how well you manage your credit and debts in the past and now.
3) Length of Credit - 15%
Next, your credit score is based on the length of your credit history. The longer credit history you have the more reliable and trustworthy you look to lenders. I look at this as your long-term credit reputation. If lenders can see you've had a long healthy relationship with credit they will be more likely to loan you money at the best rates. Keeping older accounts open is important for this factor.
4) Types - 15%
What types of credit do you have? Someone who has a mortgage, two credit cards, and a student loan will look more attractive to a lender than someone who just has one credit card open assuming that the first person is meeting their obligations. This is something you tend to build over time. Don't go out and open 4 credit cards at one time, but always be looking to diversify the types of credit you have.
5) Pursuit - 5%
This last and very small part of the puzzle is based on what credit you are constantly seeking. Lenders want to see that you aren't just sitting on the credit you have, but that you are also looking to acquire credit in the future. In my opinion this is almost a negligible piece to the puzzle. Focusing on your past and current credit experience coupled with the accounts you have and how long they've been open is way more important than the credit you are looking at next.
If you are interested in finding out what your credit score is, you can use this MSN Tool to estimate your credit score. Or, if you want an official document explaining your credit score, you can get your score for free from My FICO.
In the next post, we will look at things that can hurt your credit history and score. Also we can address how bad credit can cost you in the long run.
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