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How To Use Your Credit Score

Oct 11, 2007
Your credit score is one of the most important decision-making factors that lenders use when they are considering you for a loan. The loan may be for a new home or new car or it could be a very small personal cash loan. Your credit score is used in almost all of these decisions, regardless of the size of the loan or the nature of the loan. For this reason, it is imperative that you understand what your score is and how it got to be that way.

Formulating a credit score can vary from one country to another. In the United States, a credit score is a number that is based on a somewhat complicated statistical analysis of a person's credit report. The credit score is used to represent the creditworthiness of that person. In other words, can the lender trust you to pay back the loan?

For the most part, your credit score is primarily based on credit report information that has been supplied through the three major credit bureaus. Keep in mind that your credit score is just one number that is derived through the information sent from the credit bureaus.

Banks, mortgage lenders, credit card companies and other types of lenders use the credit score to evaluate your credit history. They want to know if you are a good risk or a bad credit risk. The credit score is just one factor that they use when deciding if they will give you a loan or not, but it is an important factor because it also is used to help the interest rate that will charged, the credit limit, and other issues concerned with the loan.

The most widely known score in the United States is FICO. This is also the most widely used in the home mortgage industry. There are many other credit score systems as well, such as NextGen, VantageScore, and the CE Score.

The exact formulas for calculating credit scores are closely held secrets, but the Fair Isaac Corporation has revealed that the following components are normally used and given the approximate value:

35 per cent punctuality of payment in the past (only includes payments later than 30 days past due).

30 per cent the amount of debt, expressed as the ratio of current revolving debt (credit card balances, etc.) to total available revolving credit (credit limits).

15 per cent length of credit history.

10 per cent types of credit used (installment, revolving, consumer finance).

10 per cent recent search for credit and/or amount of credit obtained recently.

You may not know this, but because of the Fair and Accurate Credit Transactions Act (FACT ACT), each legal U.S. resident is entitled to one free copy of his or her credit report from each credit reporting agency once every twelve months.

If you wish to keep track of your credit information more frequently than yearly, you can request a report from a different credit reporting agency every four months. Keep in mind that the free report does not contain a credit score. You can buy a credit score if you wish but do understand that requesting a credit report will subject you to pre-screened offers of credit cards. To prevent all three credit bureaus from making your address available to credit card companies for this purpose, you may opt out by calling 1-888-567-8688.
About the Author
Peter Kenny is a writer for The Thrifty Scot, please visit us at Secured Homeowner Loan and Credit Report
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