subject: A Credit Score Reflects Credibility [print this page] A Credit Score Reflects Credibility A Credit Score Reflects Credibility
What makes a good credit score? What makes a bad credit score? A credit score is a mathematical expression of a person's credibility. It tells banks and other financial institutions whether or not to take a financial risk on someone. When lenders talk about your credit score, they usually mean the FICO score (a calculated number ranging from 300 to 850) developed by Fair Isaac Corporation. Higher FICO scores are better. Most people score in the 600's and 700's range. FICO scores above 700 are considered very good. FICO scores below 600 are considered a high risk to lenders. Lenders tend to charge higher interest rates or turn down credit applications for those who have credit scores less than 600.
Building a good credit history is important to anyone who plans to make major purchases. You probably know that your credit score is the key to accessing loans to help pay for everything from education to a new car to your first home. Building a good credit history is not difficult to do. There are a number of things a person can do to establish a credit rating. Begin by opening a checking account and a savings account. Use the checking account for most expenses, and always make sure you have enough money to cover the checks. Wait at least one year to apply for a loan after establishing the checking and savings accounts.
To receive a credit score, one must first have credit. Credit cards, lines of credit, and loans all help establish a credit score. Store charge cards are a great place to start if you have very little or no credit history. This is because stores are typically not as strict with application requirements. Apply for one or two credit cards. Too many credit card applications in a year can have a negative influence on your credit report, so do not apply for more than one or two credit cards per year. Make small purchases with your credit cards, and pay them off in full each month. Doing this will help create a good credit history. In a year or two you should have a credit score worthy of a bigger auto loan or mortgage.
Another way to improve your credit rating is to stay at your job for as long as possible. Job-hopping can be harmful to your credit report. Maintaining a stable residence is also important. If you move every year or two it may appear as if you move to avoid bills or rental payments.
Review your credit report annually so you know what is being reported. Having incorrect information on your credit report can be detrimental to your credit score. It will not affect your credit score to request and check your own credit report. If there is an error on your credit report, write to the credit bureau and ask for the mistake to be corrected. It can also help to contact the creditor who reported the error. Some creditors will contact the bureau on your behalf.
Living with bad credit can be quite stressful. If you need to improve a bad credit score keep the following in mind:
- A credit score reflects credit payment patterns over time, with more emphasis on recent information.
- Late payments and collections have a major negative impact on your credit score, so pay your bills on time.
- High outstanding debt can negatively affect your credit score, so keep balances low on credit cards and other revolving credit.
- Pay off debt rather than moving it around.
- Pay off your debts with the highest interest rates first.
If your debts are overwhelming, contact a nonprofit credit-counseling organization to work out a debt-consolidation plan. A counselor will help you consolidate your debts and will contact your debtors on your behalf to reduce or eliminate finance charges. This can actually reduce your monthly payments by as much as 40 percent. Creditors will agree to reduce or eliminate interest rates under a debt consolidation plan because it saves them the expense of collection efforts and increases their chances of recouping the balance.
Avoid companies offering credit repair or debt consolidation loans. These companies can put you further into debt. Some will take your money with promises of debt consolidation but will not carry out the agreement. You should avoid any company that wants you to pay up-front fees before they have looked at your situation. Be very leery of any service that uses marketing scams such as spam, email, junk mail and telemarketing. Community bulletin boards that post debt relief or debt reduction should also be avoided. Keep in mind it should be you that searches the company out, not the other way around.
Filing for bankruptcy is always an option, but your credit history will reflect it for 7 to 10 years, making it very difficult for you to get a car or home loan in the future. Bankruptcy is really the last resort for debt relief. If you can not afford to pay your bills, you have no savings, and have tried credit counseling, then you might want to consider filing. However, if you can create a budget which allows you to live reasonably, and pay off your existing debt then do not file.
Although it may be difficult consider selling valuables or liquidating assets that will help you pay your debts. Buy only the bare essential such as food and gas, and use the rest of your earnings to pay off your debts. Live a life that will help you re-establish good credit. Keep in mind credit reflects credibility. Pay your bills promptly. Keep the same residence and job. Maintain savings and checking accounts. Set a budget and stick with it. Once you have repaid your debts you can apply for a new credit card and continue to build a good credit history!
