What You Should Know about Consumer Credit Scores
Understanding your credit score is critically important if you are going to apply for a credit card or finance your next car. This numerical indicator of your creditworthiness is calculated by credit bureaus and is used by banks and credit card issuers to evaluate the likelihood of you repaying your debts.
Your interest rate on a credit card or a loan is almost certain to depend on your score and the higher your score, the lower the rate.
It's also helpful to know a few things about credit score pitfalls that could someday give you trouble. First and foremost, you should be aware that credit scores are frequently used for purposes other than assessing your borrowing risk. Increasingly often, your personal worthiness is evaluated on the basis of your credit score in many areas of life that are not even related to borrowing money. You may find that government departments, insurance companies, utilities, potential landlords, and even prospective employers will check your credit history and score before dealing with you. So, the result of not knowing and improving your credit score could not only be a denial in credit, but also a failure to obtain a job, apartment or needed service.
Accordingly, it's a good idea to obtain your credit score from one or more of the major credit reporting agencies and to check your credit report for any negative or inaccurate items. Be sure to correct any negative items before you start searching for a job, apply for credit or attempt to purchase insurance.
What else should you know about your credit score? Well, one could write a book about this three-digit number, the various methods of its calculation and its impact on our financial and personal life. However, you only really need to know several things to be able to read, track and control your credit scores:
- The most common type of score - the FICO score - ranges from 300 to 850 and the average is 678. However, with the rising rate of credit defaults, the average credit score accepted by many lenders is increasing. Nevertheless, if your score is somewhere near 800, you can still obtain the best credit terms and lowest rates.
- Credit scores are not based on your age, race, religion, marital status, national origin or income. However, your score does include and depend on your identifying information, credit history, public records and number of credit inquiries.
- Remember, about 90% of American consumers have some inaccuracies on their credit reports which can pull their credit scores down. So check your credit report regularly and promptly dispute any incorrect items. Requesting your credit report does not lower your score.
- The best ways to improve your credit score are: make payments on time; don't max out your cards; pay balances off instead of carrying them from month to month; don't open too many accounts within a short period of time; and make sure that you don't close zero balance accounts.
From finding a job to getting insurance, you'll succeed in anything that requires a credit score check if you work toward improving your score by being aware of how it works, and what it depends on.