When it comes to credit, many people take the ostrich approach and bury their heads in the sand, hoping a good credit score magically appears. Whether we like it or not, credit plays a large role in our financial lives. And with a little education, you may see that it is not something to be feared but rather understood and cultivated to be used to one’s advantage.
Let’s start with the basics: The credit bureaus rate your creditworthiness on a scale from 300 to 850, with the average credit score falling somewhere around 670. When considering a large purchase (a car, home, etc.), it is important to understand the role your credit score will play in the finance transaction. The higher your score, the more likely creditors will deem you to be a worthy investment and the more likely you are to obtain a better interest rate and more favorable loan terms.
The three major credit reporting bureaus (Experian, TransUnion, Equifax) each have their own unique formula for calculating your score which translates to how risky lenders perceive you to be. As a general rule of thumb the scores are weighted as follows:
• 35% – Your payment history (Are you paying on time?)
• 30% – Your balance vs. your available credit (Are your credit lines maxed out?)
• 15% – Credit history (How long have your accounts been open?)
• 10% – Type of credit (Do you have a good variety of credit lines?)
• 10% – Recent inquiries (Are you trying to get a lot of new credit lines at once?)
By visiting www.annualcreditreport.com, you can receive a free copy of your credit report once per year to check for errors, fraud, etc. Be wary of sites that require fees or automatically enroll you in a credit protection program. Giving some attention to your credit score before making these big purchases can save you in the long run.
Erin Whiteside is a licensed mortgage loan originator with Fidelity Mortgage Services, specializing in residential lending. Questions and comments may be directed to erin@erinwhiteside.com.
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