What’s the Deal with Credit?

This is the first article in a two-part series about credit score information.

When applying for a loan or a credit card it can seem kind of strange where that three digit credit score comes from? What are these strangers looking at that decides if you get a loan or not.

So what is a credit score? It is in essence your grade on how you have handled credit or debt in the past. It is not a random figure but more a formula that credit bureaus provide to lenders to help them assess the risk in giving you money.

What Information is Included in a Credit Score?

Chances are you were affecting your credit score before you even knew it. When you got your first bill all in your name with your social security number attached to it your repayment history was getting a score. Was that payment on time, was it paid in full? All these things contribute to your credit score-and more! Here are the 5 major pieces of information that comprises a credit score:

  • Payment History (35%)
  • Length of History (15%)
  • New Credit (10%)
  • Types of Credit Used (10%)
  • Debt (30%)

Something you might find strange is that your income is not figured into your credit score. Another thing to keep in mind is derogatory information can only stay on your credit report for 7 years. However, a Chapter 7 bankruptcy stays on your report for 10 years, but good information stays for life!

Where Do You Fit In?

The majority of the population have a credit score between 300 and 800 with only 13% of the population having a score higher than 800.

If your score falls into one of the categories below, here is what your credit score says about you:

  • 300-500: This score range usually means there is a pattern of late payments on bills. There might be one or more accounts that have gone to a collections agency for payment. There is usually other information on your credit report that shows you are a risk to lend money to and that is how lenders justify charging a higher interest rate or declining you new lines of credit.
  • 600-700: Means most payments have been made on time and no accounts have gone to collections. A score of this magnitude implies you are a dependable customer likely to pay the money back that you borrow.
  • 700+: A score this high shows lenders that you are financially savvy and do not take on more open credit than you can handle. People with scores this high can get credit quickly and easily with the lowest interest rates a lender can offer.

Tune in next week for information on how to improve your credit score!

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