Increasingly, credit scores are not just being used by potential creditors but also by your insurance company, employer and landlord to find out your creditworthiness. It’s important for your insurance company to know how much to charge you, just as your employer would use it as a yardstick to know whether to hire you or promote you.
Similarly, your credit scores would help your landlord to decide whether you are a good candidate to let out his property to. Of course, credit scores are used in many more situations than these, so it’s best to keep them in good shape.
What is a credit score? It is a numerical measure of your creditworthiness. If you want to buy a car, automotive companies will check out your creditworthiness by accessing your credit score before approving your application for a car loan, as will mortgage lenders, retail stores and automotive companies. A bad or low credit score can deter them from giving you a loan or credit card while a high score can get you the best interest rates.
The three credit bureaus, TransUnion, Experian and Equifax in the United States calculate credit scores with the help of Fair Isaac Company’s (FICO) software. Your credit report contains a history of your loans, credit cards, bankruptcies, and collection accounts, etc, which go to calculate your score, ranging from a low 300 to 850.
How it works: Each month, these bureaus update your credit scores based on reports from your creditors. Of course, this will change your score. If your report remains unchanged for six consecutive months, your credit file will be closed and you will not have an FICO score.
Good credit: If you score 725, it is considered “good credit,” while anything between 760 and 850 will make you the perfect candidate for best interest rates from lenders.
Factors that affect your score: If you have defaulted on your payments several times, or you are in debt, the kinds of credit you have and the length of your credit history are factors that affect your score. Delaying mortgage payments, going into foreclosure, short selling your home or filing for bankruptcy also affects your credit score.
Payment history: If you have a history of paying late into your accounts, this works against you in terms of a good credit rating. However, this can be reversed by paying promptly and making your accounts current.
Overuse of your credit card: Your credit score can be improved if you have available credit which you don’t use much. This improves your creditworthiness.
Also, if you open a fresh account, it points to your current creditworthiness.
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