In times of economic hardship, people often make decisions that lead to credit problems in the future. Knowing what your credit score is, how it is evaluated, and what it can effect can help you to make better decisions that will make your present and future finances more stable.
Your credit score is a number calculated by the three major credit reporting agencies – Equifax, TransUnion, and Experian. It is made up of separate components. They are, in order of importance:
- Payment history: 35% of the score is made up from your timely payments of your obligations.
- Debt-To-Income Ratio: 30% of the score is the total balance of amounts owed. Debt-to-income ratio plays a big role in this category and must be lower than 45%. A good ratio is considered to be less than 30%. Any debt-to-income ratio over 45% is generally an automatic rejection of credit. It is important to note, the debt value is only the items that are reported to the bureau and could differ from your actual total debt.
- Length of credit history: 15% is calculated from the time it took you to establish credit.
- New Credit: 10% of any new recent obligation of debt that is added to your existing debt.
- Types of credit in use: 10% is a healthy mix of life style i.e., car, house, and furniture.
Your credit score can affect your loan application acceptance for a house or car, or even when you apply for a credit card, because lenders need to know what outstanding financial obligations you already have. Keeping track of your credit history can help you prepare for major purchases and transitions in life.
Before pursuing a loan application, you should make sure you know your credit score. According to the Fair and Accurate Credit Transactions Act of 2003, the credit reporting agencies are responsible for providing you with yearly reports on your credit at your request. This does not include your score, however – that number will cost you $12-15.
Here is a general breakdown of how credit scores are viewed.
|Category||Range of Score|
|Bad Credit Score||300-499|
|Poor Credit Score||500-579|
|Low Credit Score||580-619|
|Average Credit Score||620-679|
|Good Credit Score||680-699|
|Very Good to Excellent Score||700-800|