Your ability to secure credit and successfully manage your debt is one of the most important aspects of your life, both financial and otherwise. Your credit management is tracked by your credit report and credit score, which are also used by creditors to evaluate your level of risk when you apply for credit.
Credit Score
Your credit score is a snapshot of how well you manage your credit based finances. Credit scores numerically express the information found in your credit report, which shows your entire credit history. These two pieces of information, in conjunction with each other, can literally make or break your quality of life.
Credit Score Factors
Your credit score is a weighted summary of your credit report that gives emphasis on the most important areas of your ability to manage your debt. The most important part of your credit score is your payment history, which comprises 35 percent of your score. Next is the amount of your outstanding debt in relation to your credit limits. Combined with your payment history, these two factors make up two thirds of your credit score. The average age of your open accounts, the number of times you've applied for credit recently and the mix of your credit accounts are the basis for the rest of your score.
Debt to Income Ratio
Your credit score isn't the only number you should be aware of as you make credit based decisions. You should also be aware of your debt to income ratio. Although you may have a great credit score, if your monthly obligations are equal to your monthly income, you're in trouble. For this reason, your debt to income ratio might be an even better indication of your financial health and your ability to repay loans and credit cards. Bankrate.com recommends that you have a debt to income ratio of approximately 36 percent; that is, if your monthly income is $3000, the amount you owe to your creditors each month shouldn't exceed $1080.
Importance of Credit
Your credit score and your debt to income ratio aren't just numbers - they're the keys to the life you've always dreamed of. If you have good credit and you can successfully manage your debt and pay off your creditors, you can get the best interest rates on a mortgage or a car loan. This allows you to save thousands over the life of your loan. On the other hand, if you have poor credit and your debt is close to or in excess of your income, you could find yourself in serious trouble. Not only will you have difficulty scraping by, but if you do apply for credit, you'll either be denied or you'll be charged the highest interest rates possible. In the end, you control which financial future is ahead of you, as it's your ability to pay back your creditors that determines your credit score and debt to income ratio.
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