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Thursday, July 29, 2010

Your Credit Score

Your credit score is a number that helps others to understand your financial health. It is used by lenders, landlords, medical providers, and others to predict how likely you are to make payments on time. It is increasingly used by potential employers to predict what kind of an employee you may be. Your credit score can affect whether or not you can get loans, what your interest rate will be, whether or not you can rent an apartment, even whether or not you would make a good employee.

A good credit score can save you money and make your life easier. A poor credit score can make a serious impact on your life. Do you know how your score is calculated?

Around 35% of your score is based on your payment history. It includes how many of your accounts are past due, how many are paid on time, whether or not you have delinquent accounts, and how long a time period you may have had overdue bills.

Around 30% of your score is based on the amount you owe creditors. An important part of this score is how much credit is available vs. how much you owe. For example, if you have a credit card with a $1000 limit, your score is higher if you have an unpaid balance of $100 on that card vs. $900.

Around 15% of your score is based on your credit history--how long you have owned a particular credit card. Cards that you've owned a long time and managed well reflect positively on your credit.

Around 10% is based on the number of credit cards you have recently opened. Applying for or opening several cards at once makes it appear that you may be in need of credit to survive--not a good signal.

Around 10% is based on the mix of credit used (mortgage, credit card, auto, etc). A mix of credit is better for your score than only one type--don't buy a car with a credit card!

To improve your score:

-don't carry a balance on your credit cards. It is a myth that carrying a balance on your credit card improves your credit score!

-don't open multiple lines of credit "just in case".

-don't open multiple store credit cards to get a percentage off of that day's purchase.

-make all of your payments on time.

-don't ignore past due bills.

-when possible, don't buy things on credit that can and should be saved up for.

Other things to consider:
-for the healthiest score, owe as little money as possible and pay your bills on time.
-not all credit accounts are the same. Medical bills are weighted differently than, say, a credit account at the local shoe store.
-your credit score DOES NOT include your age, gender, occupation, where you live, religion, or salary. A potential lender may ask for proof of your salary, but it is NOT part of your credit score.
-bad credit scores can be improved.
-check your credit score once a year to make sure there are no mistakes or identity thief issues. These are the three main credit report companies: Eperian, TransUnion, and Equifax. Do not give personal information to a third parties who offer to get a free report for you!

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