Credit score

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A credit score is a three-digit number which presents a statistical analysis of a person's credit files to show his credit worthiness. By refering to your credit score, lenders can predict with some accuracy how likely the borrower is to repay a loan and make payments on time. It's how electronics and department stores also offer instant credit based on your credit score.

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Why should I be aware of this?

We depend on credit for so many important things such as buying a car, house or computer or getting a student loan. A three-digit number -- your credit score -- can determine whether you can do these things and even how much it will cost you.

All about credit score

A credit score is determined much like a grade in school. The grades are determined approximately in the following order:

  • Payment history determines 35 percent of the score. This is one of the primary informations a lender wants to see to find out how promptly you pay your bills. The score is affected by how many bills have been paid late, whether you face bankruptcies etc. These reflect more badly if they are recent cases
  • Your outstanding debt comprises 30 percent of the score. Information such as how much you owe on car or home loans, how many credit cards, their limits, dues etc.
  • The length of your credit determines 15 percent of the score. The longer you've had established credit, the better it is for your overall credit score.
  • 10 percent of the score is based on new credit. Negative points are given for opening new credit accounts
  • Types of credit you currently have get you another 10 percent. It will help your score to show that you have had experience with several different kinds of credit accounts, such as revolving credit accounts and installment loans.

What can I do about it?

You have to be careful about your credit as a low score can stand in the way of getting a loan for your home or car. Even if u get a loan, a low score can make it expensive for you as lenders will attach a higher interest rate to your loan, and your monthly payments will jump. The following steps can help you improve your score:

  • A large number of credit reports contain errors so review your report and rectify the errors. Getting rid of these negative mistakes can improve a score dramatically.
  • Keep old credit accounts, even if you're not using them. Creditors look at the debt-to-credit limit ratio and the average age of your accounts.
  • Reduce your balances on credit cards to 75 percent or less of your available credit (25 percent is preferable).
  • Paying bills on time is the most effective way of improving your score
  • Inquiries on your credit card reduces your score. So take care to ensure no one makes enquiry?

References:

  • How Credit Scores Work