Understanding Your Credit Score

A great mystery for many U.S. consumers is the credit report/credit score system. These scores are available to, and affect dealings with mortgage lenders, banks, utility companies and prospective employers among others. Unfortunately those pirates you see singing about free credit reports on TV are not much help.

A credit score is a numerical value based on the information found in your credit report. This score gives lenders an idea of what type of credit consumer you will be based on your credit history. Loan approval, loan rates and terms are all determined by how the creditor views your credit. The higher your score, the more likely you are to get credit, at better rates.

Most scores range from 300 to 900, with the majority of people in the 600 to 800 range. To get the most favorable interest rates, you’ll need a score of 720 or higher. In terms of interest rates, a person with a credit score of 520 will get interest rates on loans that are three to four percentage points higher than rates given to a person with a credit score of 720. (source creditreport.com)

Since your credit score is a reflection of your credit report, a number of items in your credit report could negatively affect your credit score. Creditors may look unfavorably on late payments, a short credit history, multiple new accounts, multiple credit card accounts and bankruptcies.

To improve your credit score under most systems, focus on paying your bills on time, paying down any outstanding balances, keep your balances at or below 25% of your card limit, don’t transfer balances, and pay off your debt. Improving your score significantly is likely to take some time, but it can be done.

It is also very important to review your credit reports annually to find any mistakes that could negatively affect your score. If you find errors in your credit report, you may dispute the information and request that the information be deleted or corrected. To do so, you should contact either the credit bureau that provided the report or the company or person that provided the incorrect information to the credit bureau.

In some cases, a lender may tell you your credit score for free when you apply for credit. For example, if you apply for a mortgage, you will receive the credit score or scores that were used to determine whether the lender would extend credit to you and on what terms. You may also receive a free credit score or scores when you apply for other types of credit, such as an automobile loan or a credit card.

You can get one free credit report every twelve months from each of the nationwide credit bureaus–Equifax, Experian, and TransUnion–by

visiting www.annualcreditreport.com