Released November 18, 2009
AUBURN UNIVERSITY, Ala. – In today's economy, you should be cautious about how you handle your credit. Your credit score is vital because it determines if you are credit worthy. The following information may help you make better credit decisions. Your credit score is vital because it will determine if you are credit worthy.
Credit scores are computed by lenders using a formula developed by Fair, Isaac & Co. to determine if you are a good credit risk. The models analyze your credit history based on five categories:
- Payment history
- Amount you owe
- Length of credit history, and
- New credit and credit mix
Lenders base the interest rate for loans and mortgages on your credit score, which until recently, you were not able to see. To get your FICO score when you order your credit report, request a copy of your credit score. Credit reports are free yearly, but credit scores are not. The scores run from 375 (worst) to above 900 and are generated through complex statistical models. Usually, the higher your score the lower your interest rate will be.
Payment history. Thirty-five percent of your score comes from your credit account payments, with most recent payments counting more than older payments. If you have consistently paid your bills on time, your score will be higher.
Amount you owe. Thirty percent is based on your current debt load -- how much you owe on all of your accounts, if you generally carry an unpaid balance on credit card accounts. Getting credit only when you need it and using it below your credit limits lead to higher scores.
Length of credit history. Fifteen percent of your score is based on how long you have used credit.
New credit. Ten percent is based on recent credit applications. You'll be scored lower if you have loaded up on credit by applying for more credit cards. In other words, don't get a credit card just for the 10 percent discount on that day's shopping. Having access to a lot of credit, even if you don't use it, lowers your credit scores. Potential lenders may view numerous inquiries about your credit negatively because this may indicate that you will overextend your capacity to pay your credit bills. If you do not want to receive unsolicited credit offers, call 1-888-5OPT-OUT (1-888-567-8688) and ask to have your name removed permanently from all three credit bureaus for possible solicitation.
Credit mix. The last 10 percent is based on the type of lenders you deal with.
If you need to improve your credit ratings, take the following steps:
1. Reduce your debt. 2. Show restraint in applying for new credit. 3. Always pay on time. 4. Don't charge near your credit limit. 5. Be careful about closing accounts.
In summary, stay in good standing with your credit scores if you want to continue to be credit worthy. Make the best credit decisions you can to benefit you and your family. Whatever decisions you make today concerning your credit will affect your future.
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