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A Guide to Credit Scores

A person's credit score indicates credit worthiness and impacts their ability to make life's most important purchases. Lenders use a consumer's credit score to decide whether to lend money to them and at what rate. People with higher credit scores are considered lower risk and are likely to get better loan terms (lower interest rates) than people with low scores. The more you know about your own credit history, the better you can position yourself for lower rates when applying for a loan or insurance coverage.


Credit Score Vs. Credit Report

Your credit score is akin to your cumulative GPA, while a credit report more closely resembles your grades from every report card over the past seven years. Credit scores reflect the information in an individual's credit report, which is why you should check your credit report for accuracy at least once a year. Your credit report, which indicates whether a person pays their bills on time and how much of their available credit they use, influences your credit score. 


A Good Score

Score meanings vary depending on the method used. A credit score can range from 300 to 850 depending on the rating agency. Generally, about 35% of the score is based on payment history; 30% is based on the ratio of outstanding debt to credit available, even if the credit hasn't been used (known as debt-to-credit ratio); 15% is based on how long a consumer has had credit; 10% is based on the number of inquiries into a report; and the other 10% is based on types of credit. Some lenders also have their own scoring methods. Other scoring methods may include information such as income or length of time at the same job. An "excellent" credit score is generally considered to be above 720. However, this varies depending on which credit bureau awarded the score and which bank is extending the loan offer. 


Improving Your Credit Score

It is important to know that there is no overnight fix for a low credit score. However, there are steps you can take to improve it over time: 

Check your credit report annually.

Make sure your credit report is accurate before applying for a loan (such as a mortgage) to get the best terms. You can get one free copy of your report each year from each of the three credit reporting agencies by calling the Federal Trade Commission at (877) 322-8228 or by visiting their website. You can also obtain your credit score from any of these credit bureaus for a reasonable fee. 

Pay your bills on time.

Pay at least the minimum due, but paying more is even better. 

Watch for warning signs of credit trouble. 

If you only pay the minimum balance, pay late, or use cash-advances to pay daily living expenses, you might be in the credit "danger zone." For more information on debt management, contact the National Foundation for Credit Counseling

Don't use too much of your available credit. 

To boost your credit score, try not to use more than about 30% of your available credit on any credit card. 

Don't skim- read the fine print. 

A loan or credit card application is a contract, so read it thoroughly before signing. Be aware of introductory rates that expire, as well as the length of monthly billing cycles. 

Ask questions.

If you don't understand the terms of a loan, ask. If you've been denied credit, find out why and then ask the lender how you can improve your chance for approval in the future. 

Set a budget and stick to it.

Develop a financial plan to keep your finances in order. Don't spend more than you can repay and don't "max out" your credit cards. 

Comparison shop. 

Don't jump at the first appealing offer; compare rates and fees offered through mail solicitation, on the internet or at your local bank. 



Source: American Bankers Association