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Things You Never Knew About
Your Credit Score
by Lee Masterson
Have you ever wondered what your credit score means?
Your credit score (or FICO score) is a numerical summary
taken from the information in your credit report, which
is calculated using a formula taken from all three credit
reporting bureaus.
The formula takes into account various factors, which
include:
• your repayment history or credit performance
• your current debt levels
• the types of credit you use
• your length of credit history
• any new credit you’re trying to apply for or
have applied for in the past 12 months.
What Does Your Credit Score Mean?
The highest possible credit score a person can receive is
850 with the lowest score being 300 – although the
median in America is around 720.
When assessing your suitability for a loan, lenders will
look at your credit score. This gives them an idea about
your past history with repaying money and helps them to
assess your ‘risk factor’.
The way banks see it, the lower your credit score the
higher your risk factor in their eyes. A low credit score
tells them you have a history of bad repayments with
other creditors. Of course if you’re considered a
high risk borrower then banks tend to opt for a
“rate-for-risk” approach when it comes to
determining what interest rates you’ll be charged.
If your bank sees you as a high-risk borrower, then
you’ll probably receive higher interest charges as a
result.
The same is true in reverse too. Those people with high
credit scores are likely to be offered the best interest
rates. Banks view people with high credit scores as
‘low risk’ as it shows they already have good
repayment history. Banks are willing to reward people
with a good credit score as they are likely to remain
good clients and pay their bills on time.
Factors Affecting Your Credit Score
Most people know your credit score is affected by late
payments on bills. Delinquent accounts, payments over 30
days late, any accounts turned over to a credit agency or
collection and bankruptcies are shown on your credit
report and your credit score is reduced accordingly.
But your score could also be affected negatively if your
credit report shows a higher than normal amount of
‘hard’ credit applications in the past 12
months. Hard inquiries are those generated every time a
lender or company accesses your credit report for the
purpose of extending credit. The more times you apply for
credit in a 12 month period, the more negative effect it
can have on your overall credit score.
Another thing that can really reduce your score is high
levels of available debt. Even if you pay down the
balance to zero on all your credit cards each month, just
having high limits available is taken into account. Banks
will add up the total amount of available credit and this
figure is enough to drop your total credit score.
Improving Your Credit Score – Little Things
The first obvious fix would be to have any errors
removed. Sometimes information gets mixed up. If your
credit report shows any errors, you have the right to
dispute these. Companies have 30 days to respond to any
challenges you have.
Another easy step you can take is to increase your
payment frequency. Divide your monthly payment by 4 and
pay that amount weekly. This can help the lender see
you’re serious about keeping things on time and
they’ll report this to the bureaus. Do this with as
many bills as you can. It not only helps you to budget
more effectively, but it helps to keep payments on time
and regular.
Round up your repayments to the nearest $5. There’s
no point paying a bill for $98.12 when you can round it
up to the nearest $5 – which would make that payment
$100. That extra repayment is not going to break your
budget, but it will show a lender that you’re paying
more than you need to, helping to improve your score
again.
If you have any credit cards with a zero balance, keep
one favorite and close out the others. Reduce your
available credit limits to only what you might need for
emergencies. Remember – banks frown on large credit
limits.
Improving Your Credit Score – Big Things
Despite those late-night infomercials telling you how
easy it is to fix your credit, there are some things that
just can’t be fixed easily.
Be aware that some things can’t be removed until
that information is true and correct – and that can
take time!
Court judgments, liens and wage garnishments remain on
your credit report until you’ve amended that entire
overdue balance. Even then, the information may remain on
your report for some time after you’ve cleared the
account.
A bankruptcy might seem like the easy way out of a
situation at the time, but it takes 10 years for a
bankruptcy to be removed from your credit report. If you
honestly think you won’t need any credit at all for
the next 10 years, then go ahead and give this avenue a
shot. The truth is bankruptcy really should be a last
resort only and there are other things you can do prior
to taking this drastic step.
The easiest way out is to avoid bankruptcy if at all
possible. Work out alternative solutions with your
creditors and find a way through your credit problems.
Ring and negotiate a payment plan. Then stick to that
plan. It won’t be easy – but it’s a whole
lot easier in the long run than a bankruptcy.
You’ll be grateful in the future when your credit is
only marginally affected.
The best solution of all is to avoid credit problems in
the first place. Don’t be afraid to speak to your
lender and make arrangements if you think you’re
going to be late with a payment.
Lee
Masterson is a freelance writer from South Australia and
is one of the founders of MortgageLoanHints.com. She has
worked in banking and finance for more than 10 years and
now spends much of her time trying to help people control
and manage their debt. You can find more of Lee's
articles here: http://www.mortgageloanhints.com
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