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When
you apply for credit one of the first things
almost all credit officers do is check your
credit score.
Although not all of those officers explained to us
what a credit score is, we are all rated according
to it and the offers we receive were all dependent
on that score. This is why understanding your
credit score is of utmost importance, and for
future reference at least basic knowledge should
be acquired. In the following paragraphs we will
tackle understanding your credit score, realizing
what your credit score means and analyzing what
you can do to improve it.
Credit
score is actually computed as an average of
several elements from your
credit report.
This report is typically broken into five
different sections and each of these sheets will
represent a piece of the final score. Each
category of credit report information occupies a
certain percentage in the final score. To begin
with, it is essential to say that the highest
percentage is taken by the category made up of
credit and payment history. An issuer will look at
all types of payments:
credit card
payments, retail accounts, installment loans and
so on. He or she will particularly look at the
number of delayed or not paid payments, time
passed since the last skipped payment, number of
problematic accounts as compared to accounts in
good standing.
The
next thing taken into account when computing the
score is the total amount owed. These amounts are
looked at in their absolute value and also in
proportion to the
credit limit.
The number of accounts with balances is also
relevant. The third thing issuers analyze is
credit history,
or how much credit you’ve had and for how long.
Understanding your credit score is essential to
you and you need to know that the length of all
credit lines
and their activity will be monitored and will
matter significantly in the final credit score.
Also, remember that all scores take into
consideration recent credit activity. This
category includes number of credit inquiries, new
opened accounts, their amount, the time since they
were opened and of course reestablishment of
credit history if there were any issues in the
past. Last, even if many people do not regard it
as important the type-element is also significant
- that means that the type of
credit line
you have (credit card, installment, mortgage) also
plays a role (about 10% of the final score) in
computing your credit score. You also need to
understand that your credit financial report is
the basis of computing your score. Each of the
above mentioned elements is specific to every one
of us, and as such if for some people amount owed
is the major factor for others credit history is
essential, therefore it is impossible to give
exact percentages as to how much an element weighs
in the final credit score.
Understanding your credit score, none the less, is
not the only important aspect, managing it is also
important. You will be able to improve your credit
score if you follow a few simple tips. First of
all, try to pay all the bills in time. This is
more important than any of the other factors. If
it’s not possible to pay on time you can usually
get away with paying the bill within a 30 day
window of the due date. If you miss this date it
is almost certain to end up on your credit report.
Keep balances low on your
credit cards
and other revolving credit and try to pay off
debt. Also avoid moving credit from one credit
card to another. The low intro rates many
companies offer for
balance transfers
can be very helpful, but it takes a toll on your
credit score. It is also recommended that if you
plan for applying for important credit soon, avoid
opening too many other new accounts. When in
doubt, hire a financial consultant. Most people
may see this as an expensive luxury that they
can’t afford, but in reality financial consultant
prices are fairly reasonable. Even a single visit
can help you drastically improve your credit
score, and if that results in a lower
interest rate
on a large loan it will more than pay for itself.
A consultant will also be able to explain the
credit score better.
All in
all, what you need to know is that credit score
influences depends on your credit report and it
directly influences your credit payments and
amounts. The higher the score the lower the
interest rate and the payment will be. Taking into
account the importance of this indicator,
understanding your credit score will automatically
mean you have more chances to improve and make it
higher and therefore benefit from better loans.
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