Improving credit scores
What is a credit score?
A credit score is what any prospective lender would look at before lending you money - whether it is for your house, for a car or just about any other kind of credit. A credit scores is a way of grading your ability and willingness to pay money back on time and on the terms that the lender will give you. It is calculated from information in your credit report. It?s important because it is away of summarizing all your past financial behavior into one number, making it easier for banks to decide on giving you credit. Simply put, it is the score on your financial report card.
Why is it important?
It is important because every lender will want to have a look at it before giving you any significant amount of money. It?s a pointer of whether they can trust you or not. A high credit score says: Trust me; I?ll pay you back no matter what. Your money is safe with me. A low credit score, however, says: Watch out! It?s that simple. It?s not just a question of getting credit. Lenders charge different rates from people, depending on how risky they consider them. If a lender feels that you can be trusted to repay his money are likely to get much better terms on your line of credit. So a higher credit score means that you?ll find it easier to get credit whenever you want, and also that you?ll get it at a much cheaper rate than otherwise.
Credit scores range from 300 (the pits) to a perfect 850. People with scores above 700 are usually charged relatively low rates, and those with scores above 760 are charged the lowest rates. Consumers with scores below 600 are typically charged relatively high loan rates. Of course, if your credit scores is really bad, you may be not able to borrow at all. The median credit score in the U.S is 723, and lenders generally use 620 as a cut-off number so that is the number you have to stay above at any cost. Remember, however, that different lenders will have their own layers within this range to decide who gets a better rate from them.
How is my credit score calculated?
Credit score is calculated from your credit report - which details your financial history and behavior. There are several kinds of software available to do this. There are three major credit bureaus: Experian, Equifax and TransUnion. These credit bureaus prepare reports based on any information they have received about you from banks or other financial institutions that gave you credit in the past. They track details such as your payment history, the length of your credit history, the types of credit you have and amounts owed.
How can I find out my own credit score?
You can get a credit report, but that is not the same as knowing your credit score. If you were denied credit, you have the right to ask for a free credit report from the bureau supplying the information that was the basis for denial. Some states also entitle residents to a free credit report at least once a year. There is, however, no requirement that credit scores be offered free, although with TransUnion your score is automatically included in your report, whether you get it free or not.
You can order your score report from all three national credit bureau. In addition to your score, these reports will also give you a recap of your credit history as recorded by them (based on whatever information they have received from your previous lenders), an indication of how your score ranks nationally and advice on how you can boost your standing.
There are two reasons to get your score from all three bureaus: First, each bureau may have slightly different information about you depending on which companies have reported to them on your accounts -- reporting is not mandatory and many companies will report more regularly to the bureau based in their region. Second, mortgage lenders often look at all three of the bureaus' scores and take the middle score - not the average -- to assess your eligibility. So it is in your interest to know what that middle score is and take steps to improve it.
How can I improve my own credit score?
CNN/Money offers the following advice on improving credit scores:
Pay your bills on time.
You cannot overestimate the importance of this. It is always a good practice, and it is especially critical that you make prompt payments close to the time you need a loan. A late or missed payment in the last few months is likely to lower your score much more than an isolated late payment five years ago.
Correct mistakes in the report.
Review your reports from all three credit bureau for accuracy once a year as well as several months before applying for a loan. There could be mistakes in there, because they deal with so much information and it is easy to make mistakes sometimes. But one mistake could affect your chances a great deal. There?s no point paying all your bills on time if it doesn?t show up in your report, after all.
Reduce your credit card balances.
Generally, it is good to keep your balances at or below 25 percent of your credit card limit.
Pay off debt instead of moving it around.
The key factor is the ratio of credit balance to the credit limit. If you move your debt around, it still remains unpaid from the bureau?s point of view, and will affect your score badly.
Do not close unused credit card accounts near loan time.
If you have several credit card accounts but are only using a few of them, you will only raise your balance-to-limit ratio if you close the unused ones. You also should not open new accounts while applying for a loan. If you have a short credit history or very few accounts, opening a new credit line may lower your score since you do not have a proven track record, and track record is important for a credit report because that is what all bureau?s go by - they only have your past behavior to use as a channel for what you might do in the future. Thus if you follow all these points as mentioned above sincerely, then you are very sure to improve your credit score
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