Your credit score is the single most important factor determining whether you’ll get approved for a mortgage, car loan, credit card, insurance... AND, even if you do get approved, the score will determine what the interest rate will be. Bad score = higher rate. In other words, ignoring your score could cost you money!
Don’t walk into a car dealership or a mortgage banker’s office or a credit card application blind. Know - and understand - your credit score. Thankfully, you can take a look at your money reputation by getting your credit score along with a copy of your credit report.
Your credit report has all the juicy details that creditors are sharing with each other about you. What bills have you been late on? How free and loose are you with credit cards? Are you are a good risk, someone who can be trusted with other people’s money?
So where did this score come from, and how’s it used to determine if you can get a loan or credit approval?
Once upon a time, lenders kept this score secret from consumers. But in 2001, congress made it possible for you to see your FICO score. (FICO refers to the Fair Isaac Company software that is used to determine the score. For more information about FICO scores, go to www.myfico.com)
If your score is 700-850, congratulations! You are a “prime borrower,” according to the national FICO score range distribution. This means a good APR on a loan or credit card.
If your score is 620-699, you’re gonna get stuck with “sub-prime” rates and will pay much more for any loan.
If your score is between 500-619, you may have difficulty qualifying for a loan. Your rates will be very high even if you do qualify.
Let’s take a look at the factors that make up your credit score. Then you can know how to amend it if you need to. The score is based on information in your credit report, so it’s a good idea to have a copy of that too.
CREDIT HISTORY: Until you have a history, you have no score. Having credit accounts - credit cards or loans - over a period of time will get your credit score off the ground.
PAYMENT HISTORY: If you have been late on bills or outright not paid them, this will negatively affect your score. Lenders figure if you’ve failed to pay bills in the past, you’ll probably do it again - and they’ll be stuck with the bill. By paying at least the amount due on your bills on time, your credit score will be much healthier.
BANKRUPTCIES: Not surprisingly, these lower your credit score pretty dramatically. If you choose to declare bankruptcy, be prepared to: pay all court and filing fees UP FRONT, endure exhaustive questioning by creditors, experience an ordeal that can last for moths, expose your financial background to the public and suffer negative credit ratings for years. And bankruptcy does NOT, in all cases, protect you from: back taxes, student loans, alimony, child support, new substantial purchases, and real estate contracts.
AMOUNT YOU OWE: How deep in the hole are you? For this, lenders look at how much “open” credit you have on credit cards. You might not have maxed them all out - but you could. Therefore, lenders will consider this potential debt, and too much of it can hurt your score. Having the cards maxed out will make the score even worse.
REQUESTS FOR NEW CREDIT: Repeated attempts to borrow money or open new credit cards over a short period of time can look worrisome, thus lowering your score. When planning to get a new credit card or take out a loan, do your research and make only applications you are serious about.
TYPES OF CREDIT: Folks with only a secured credit card (cards that require the user to deposit some money into an account before receiving a credit card) are seen as riskier than someone who shows they can handle different types of debt.
Check your credit score and credit report now, not when you are already filling out loan applications. It takes time to fix errors, and it takes even more time to repair money mistakes you’ve made.