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Mary Beth Peacock

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Valdosta, Ga. 31602

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What’s the Score: Your Credit Rating Explained

Your credit score is one of your most important financial tools. And like your Social Security Number, it will follow you for a lifetime. It is important to protect this score and strengthen it.
Your credit score is used to determine whether a lending agency is willing to take a risk on issuing you a loan. Additionally, your score impacts the interest rate for your loan. A good score can make a difference of around $500 in monthly payments on a $250,000 mortgage, and also can mean much lower credit-card rates.

How is a credit score calculated?

A credit score is a value used in making lending decisions. Criteria include the amount you owe on non-mortgage-related accounts, your payment history and credit history. Scorers take this information from your credit report and plug it into formulas that calculate a value representing the amount of risk you pose to a lender. Other consumers’ credit histories are also taken into account in determining your score. If you have a better history than the majority of the country’s consumers, your score will rise.
The most common rating scale is the FICO credit score. This scale ranges from 300 to 850—the higher the number, the better. To get the most favorable interest rates, you'll need a score of 720 or higher. In terms of interest rates, on average, a person with a credit score of 520 will get interest rates on loans that are three to four percentage points higher than rates given to a person with a credit score of 720.

Factors affecting your credit score

  • Your bill paying: whether you pay your bills on time, have ever been contacted by a collection agency, or whether or not you've declared bankruptcy.
  • The amount of money you owe: the more money you owe, the lower your score.
  • The length of your credit history: the longer you've been establishing credit, the higher your credit score.
  • The combination of your credit: the more variety of credit, meaning the more ways you spread out your credit (through cards, mortgages, car loans, etc.), the higher your credit score.
  • Your income and earning potential: both are indicators of your ability to repay a loan.

Ways to Improve Your Credit Score

  • Review your credit report for any errors and correct glitches that may not be accurate (but are still hurting your current score).
  • Refrain from opening a lot of new accounts over a short period of time, especially if your credit history is hasn’t been established for many years.
  • Pay your bills on time.
  • Don't open any credit lines you probably won't use. For example, don't open a lot of store credit cards just to get the initial 10 percent discount.
  • Instead of moving credit card balances to lower rate cards, try to pay them off. Transferring balances can change the ratio of your total credit card balances to your total available credit lines, hurting your credit score.
  • Try to use your credit cards less. Even better, pay them off every month. The bigger the space between your total credit limits and the balance you carry, the better. Try to keep your balance below 25 percent (for example, $2,500 if your credit limit is $10,000).
  • Contrary to what you may have heard, don't close old, paid-off accounts. Credit companies used to advise people to close old credit cards they were no longer using. But closing these cards shortens your credit report and makes you seem less credit-worthy.
  • Avoid bankruptcy. Declaring bankruptcy is one of the worst things you can do for your credit score. It may seem like the easy way out in the short term, but over time it will cost you tons in the way of high interest rates.

Is your Score treated the same for all kinds of loans?

While your score is the same regardless of the type of loan, lenders will look for a higher score for certain types of loans. To receive a more favorable rate on a mortgage loan, you will usually need a higher score than what you needed for the premium credit card rate. There are exceptions. A borrower with a low credit score applying for a 15 year mortgage with a 25% down payment may qualify for a better rate than someone applying for a one year adjustable rate mortgage. Mortgage lenders will typically look at all the risks involved before deciding on a rate.