When you are preparing to buy a home, or when you take out a personal, business or auto loan, or even if you are just reading the newspaper, you will come across the terms “Credit Report” and “Credit Score”, but what do they mean?
Simply put, a Credit Report is a collation of information that the credit bureaus collect about you, such as your payment history on loans, your credit card accounts, how many times lenders have requested information about your credit (inquiries), and how many times lenders have turned your account over to a collection agency (collections).
Your Credit Score, the most notable of which is the “Fair Isaac” or FICO score, is a number calculated based on the raw information reported on your Credit Report(s) which indicates your “loan worthiness” from the lender’s standpoint. Your FICO score directly affects how much a lender is willing to lend you, and at what terms.
5 Factors That Decide Your Credit Score
1. Your payment history. Did you pay your credit card obligations on time? If they were late, then how late? Bankruptcy filing, foreclosures, liens, and collection activity also impact your history.
2. How much you owe. If you owe a great deal of money on numerous accounts, it can indicate that you are overextended. However, it’s a good thing if you have a good proportion of balances to total credit limits.
3. The length of your credit history. In general, the longer you have had accounts opened, the better.
4. How much new credit you have. New credit, either installment payments or new credit cards, are considered more risky, even if you pay them promptly.This is why it is so important NOT to shop for a new car or open new credit card accounts immediately before shopping for a mortgage!
5. The types of credit you use. Generally, it’s desirable to have more than one type of credit — installment loans, credit cards, and a mortgage, for example.
To learn more in detail about credit scoring, and how to manage and improve your credit, visit myFico online.
Please note: this is not an endorsement of any products or services offered at the myfico website, but rather a link to a very useful and thorough resource on the topic of credit.
Repairing Your Credit
Finally, remember, myFICO is NOT a credit counseling service and is not vested in helping you improve your credit score. Their site offers a lot of good information about improving your credit, but if you are in seriously financial difficulty and your credit has suffered, you may want to seek the services of a legitimate, not-for-profit Credit Counseling agency to assist you in developing a program to repair your credit. This is a business arena which is rife with fraud so call a lender, attorney or someone you trust for a referral or check out this page from the State of Virginia on Credit Counseling.
