Explanation of Credit Scores

You cannot escape the fact that credit scores are one of the most

, if not the most, important number in your life. Credit scores typically range from 350 to 800, but new models range up to 900. People with scores in excess of 750 receive the best interest rates and insurance premiums. Lower scores result in higher interest rates and higher premiums. The best way to improve your score is to understand what makes up the rating.

Five Factors

Three credit bureaus calculate your credit score based on five main factors. Your payment history carries the most weight (35%), with recent history (between 6 months and 2 years) being the most important. The next most important factor is your debt to credit ratio which impacts your credit score by 30%. The debt to credit ratio factors the total outstanding debt against the total available credit in revolving credit lines. Your credit history, or how long you've been using credit, is the next most important factor and weighs in at 15% of the total score. The types of credit that you carry and new hard credit inquiries account for 10% each.

Impact

Improving your credit rating can seriously impact your overall costs and have an impact on your monthly budget. One explanation of how credit scores impact your life includes the difference good scores can make in a mortgage loan. For example, imagine you are taking out a home mortgage loan in the amount of $200,000. Your credit score is 750 which can help qualify you for an interest rate on a 30 year fixed mortgage of 3.75% (interest rates will change; this is an example only). In this scenario, your monthly mortgage payment would be $926.23 for principle and interest. Now let's imagine the same scenario, but your credit score is 630. For this loan, the interest rate would be higher, if you are able to qualify at all. A $200,000 loan at 5% equals a monthly payment of $1073.64, principle and interest. The monthly increase is not the only consideration. You will likely have to jump through more hoops to get the loan, your homeowner's insurance premiums will be higher and the overall cost of the house over the life of the loan increases with each interest rate increase.

Explanation of Credit Scores

By: Kat Kally

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