By Jennifer Panther
Used to be, no one paid much attention to their credit score or its impact on their pocketbook. But today, most folks know that the score is used for personal loans and credit cards, and plays a big role in getting a mortgage.
The score reflects your credit performance and is used by lenders to determine your credit risk. A higher score indicates you are less of a risk and can help you qualify for lower interest rates on loans.
Scores range from 300 to 850, with the national average at 692. A minimum 680 is needed for most mortgages at Family Trust.
A variety of characteristics make up the score and categories carry different weights. The most common are:
Payment History – 35 percent: Shows if you pay on time, if you have any past due payments and if they’ve been given to a collector.
Debt level – 30 percent: Compares the amount of unpaid debt to your credit limit. The more credit cards you have at their limit, the lower the score. In general, you should spend 30 percent or less of your limit.
Credit history – 15 percent: Looks at the number of credit lines opened in the last 24 months, account activity and when accounts are closed. The longer you stay with a creditor, the better your score.
New credit – 10 percent: Applying for new credit can lower your score. Too many inquiries in a short period can appear you need money.
Type of credit – 10 percent: You need a mix of installment credit (mortgages and auto loans) and revolving credit (credit cards and home equity lines of credit).
The law allows you to check your credit report once a year for free. Family Trust credit counselors recommend www.annualcreditreport.com, which includes reports from Experian, TransUnion and Equifax. The report details your loans and payment history as well as other information.
In addition, the law also requires consumers who are denied a loan based on their credit score to receive an explanation from the lender and a free copy of their credit score.
Lenders must provide the score when:
- The score is used to set the terms of a loan.
- A loan is approved but the interest rate is higher than the institution’s best rate.
- The interest rate on a credit card is increased because of the score.
The bottom line is that your credit score touches all aspects of your financial life. The better your score, the more you can save.
Jennifer Panther is a certified financial counselor at Financially Focused.