Lending money involves a certain amount of risk. Lenders want to minimize risk and maximize profit. That’s why your credit score is important. According to the Wall Street Journal your credit score or FICO score is the single best indicator of whether or not you’ll be able to pay on a loan.
Whether the credit you need is short term, like a new credit card or, long term, like a home mortgage or the lender will look at your credit sc0re and your credit report to determine your ability to repay the loan.
Your credit report is compiled from a number of sources. Financial institutions and credit card companies give your payment history to credit agencies. The credit agencies also review public records such as court documents that might include legal judgments against you.
There are 3 main credit agencies and you are entitled to a free credit report every twelve (12) months from these agencies. You can access your credit report online for free at: www.annualcreditreport.com.
What you must keep in mind though is your credit report and your credit score are not the same. The credit report lists your debt and payment history but the credit score is an interpretation of that information. Not all credit agencies have access to the same information. Your credit score can vary from one agency to another.
There are five factors that determine your credit score but they don’t have the same weight. Here’s a breakdown of the factors used to calculate your credit score and the percentage each factor contributes: payment history(35%), amount owed(30%), length of credit history(15%), how recently you’ve taken on new credit(10%) and the types of credit you use(10%).
A good credit score can mean a much lower interest rate and therefore lower payments. A bad credit score may mean a higher rate or you may not get approved at all. Lenders will sometimes have a base price that applies to people with average credit scores. Then they’ll discount that rate for a good credit score or add points to the rate for bad credit scores.
Other lenders will advertise a rate that is only available to people with perfect credit scores. It can be misleading when you’re trying to shop for quotes. Make sure that you know your credit score and can shop for credit based on your score, not on some unachievable ideal.
People with low credit scores sometimes feel that they have no choice but that’s not the case. Don’t get pressured into taking a very high interest loan because you have a low credit score. Each lender is different, so make sure to shop around for the best rate.
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