Your credit score is based upon the information contained within your credit report, including both positive and negative account data. Lenders and credit issuers report this data to the credit bureaus. It's important to learn what factors influence a credit score and what steps you can take to have a good one.
Identification
A FICO score ranges from 300 to 850 and the higher the score, the better. Your FICO credit score is comprised of five distinct variables, according to MyFico. When calculating the score, 35 percent of it represents how well you pay your bills, 30 percent is based on the amount of debt that you have, 15 percent reflects the length of your credit history, 10 percent reflects the mix of credit present on your report and the last 10 percent considiers the amount of new credit you've applied for recently.
Significance
Your FICO credit score can affect many areas of your life. Lenders check your credit score prior to approving a loan or other extension of credit, such as a credit card. Your score can impact not only whether you're approved but also the interest rate you'll pay for that credit. The lower your score, the higher the interest rate you'll receive and the more money the credit will cost you over time. In addition, an employer may check your credit before hiring you and some insurers check it before issuing a policy.
Considerations
According to MyFico, making on-time payments regularly and keeping your debts low will increase your FICO score over time. Those two variables account for the bulk of your score. Also, limit new credit. A good credit mix, say of loans and credit cards, accounts for 10 percent of your score and so does new credit, but FICO warns consumers not to apply for new credit in an attempt to increase the score; it could prove counterproductive. Each new credit account shortens the average length of your credit history and this can lower your score. Only apply for new credit if needed. Also, closing old accounts can shorten the length of your credit history and this may lower your score too.
Prevention/Solution
According to Bankrate.com, another step you can take to improve your score is to ensure that your credit report is accurate. Credit errors can lower your score. Under the Fair Credit Reporting Act, you have the right to dispute inaccuracies on your report. The bureau has up to 30 days to investigate your dispute and make corrections. As an addendum to the FCRA, Congress passed the Fair and Accurate Credit Transactions Act that gives you the right to receive one free credit report each year from each of the three bureaus: Equifax, Experian and TransUnion. Order the reports at the site established under FACTA: annualcreditreport.com.
Warning
Beware of companies that promise to repair your credit and improve your score because, according to the Federal Trade Commission, this can be a scam. Under the FCRA, bureaus are not required to remove accurate negative data that's within the applicable statue of limitations. Also, watch out for sites that offer free credit reports or scores. Some of these sites ask for your credit card information and require you to sign up for a trial of credit monitoring that will continue to charge your card after the trial period. The Federal Trade Commission sued Experian in 2005 for deceptive advertising over its website, freecreditreport.com. Experian settled the case and agreed to compensate consumers charged for its credit monitoring product.
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