Consumers Urged To Understand Their Credit Score and Its ImpactsApril 06, 2017
Credit scores used to be something we seldom worried about or even thought about until we needed a loan. A lot has changed in recent years and today our credit scores play a much larger role in our lives. Learn what your scores represent and the impact they have on us.
Who Creates Your Credit Scores?
Many people believe if they pay all their bills on time or have never had any credit, they’ll have perfect credit scores. Both of these scenarios are incorrect.
The Fair Isaac Corporation created the FICO credit score, which is the one that most lenders look at today. However, most consumers tend to use credit scores from TransUnion, Experian and Equifax. All three of these agencies use the FICO system when determining the scores.
What Determines Your Credit Scores?
Credit scores can range from 300 to 850. Your credit scores are based on five categories. Each category makes up a certain percentage of the total score. As you can see, some have more importance than others.
• Payment History – 35%
• Current Debts – 30%
• Credit History – 15%
• New Credit – 10%
• Types of Current Credit – 10%
Payment history is based on if you pay your debts on time and carries the most weight in making up your score.
Current debts indicates if you have high balances on credit cards with little available credit or high loan balances.
Credit history means how long you’ve had the credit cards or loans. Credit reporting agencies prefer to see you’ve had credit for a long time as opposed to closing one account and opening another a few months later. This is provided they’re also being paid on time every month.
New credit, which includes inquiries, refers to any new credit (loans, credit cards, etc.) you may have opened recently. If too many new accounts are opened in a short amount of time, it may indicate financial troubles and the need for more cash.
Types of credit indicate having different types such as credit cards, small loans, mortgages, etc. Having various types of credit, if they’re paid on time, will generally give you better scores than all of one type.
Inquiries into your credit, particularly hard inquiries, can be damaging to your credit. Any time you apply for any type of credit, even if you don’t get the credit, it shows up on your report as an inquiry. To the reporting agency, it looks like you’re attempting to get more credit.
Soft inquiries, like when someone check into your credit history for a background check, don’t affect your scores. Hard inquiries, such as for loans or credit cards, can not only lower your scores a few points, but they also stay on your record for two years.
How Credit Scores Impact Us
Our credit scores influence us in more ways than we realize. Here are some of the most common ways we’re affected by our credit scores.
• Loans – Our credit scores play a large part in if we’re approved for a loan or credit cards. They not only affect the approval process but also play a part in the interest rates we’re charged. On a large mortgage, poor scores can cost homeowners thousands of dollars over the term of the loan
• Insurance premiums - Many auto and home insurance companies also use credit scores as a way to determine risk. Someone with a lower score is deemed as someone of higher risk and may have higher insurance premiums.
• Apartment lease – Landlords may run credit reports on potential tenants and deny them the lease or charge higher rent if the applicant has poor credit.
• Employment – Employers often run a credit report on a potential employee and may refuse the individual employment if the scores are low.
• Cell phones – Most cell phone carriers determine eligibility for contracts based on credit scores.
• Satellite TV – Satellite companies also use credit scores to determine eligibility.
Credit scores play such an important part of our lives and can affect us in so many ways. Credit monitoring companies can be very helpful in knowing what’s going on with your and many are free. This allows consumers to know if there is a change and why.
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