Credit scores are numbers that are closely tied to your financial life in a variety of ways. These numbers impact almost everything you do, from determining the interest rate that you pay to helping you get a job. Understanding what these numbers are and how they work is essential to your financial future.
What is a Credit Score?
A credit score is a number that is calculated based on a formula created by the Fair Isaacs Corporation, or FICO. It is also sometimes referred to as your FICO score. The three major credit bureaus; TransUnion, Experian and Equifax, use these scores. They use the formula that was created by FICO to calculate your scores based on the information that is provided to them by creditors. This number is designed to simplify the lending process and help lenders evaluate your applications for credit more easily.
What it Affects
Your credit score can play a vital role in many different areas of your financial life. Lenders will look at this number when determining if you should be approved for a loan or some other type of financing. Besides approval, the credit score will also play a role in determining the interest rate that the lender charges. Your credit score is also use by insurance companies to determine what your premium rates will be. Landlords and companies will use your score to determine if you have to pay deposits. Potential employers can also use your credit history to evaluate you for a job opening.
What Comprises Your Score
When calculating your credit score, the credit bureaus look at several factors in your financial life. One of the most important factors that goes into your score is your payment history. If you pay your bills on time, this reflect positively on your score. The amount of debt that you have in relation to the amount of available credit you have also plays a role. The length of your credit history also affects your credit score. Creditors also look at the different types of credit that you have such as installment loans and revolving credit lines.
Boosting Your Score
If you look your credit report and determine that you have a low credit score, you are not stuck with this number. Your credit score can be improved over time if you take the proper actions. When you get a copy of your credit report, you can also usually find out why your score is lower than it should be. Use this information to plan your next steps when trying to boost your score. For example, you may want to pay down your credit cards and get in the habit of paying your bills before they are due.
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