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Understanding Your Credit Score

Your credit score is a very important number these days. Not only does it affect your ability to qualify for a loan, but it can also affect the terms of your insurance and even whether you get a new job.

FICO Score and the Credit Bureaus

Equifax, Experian, and TransUnion are probably familiar names to you. These are the three national credit bureaus. Each one keeps its own records and ranks scores slightly differently, which means your score can vary from agency to agency. All three use the FICO credit rating score to gauge creditworthiness. However, each agency has its own database, so your score can vary from one to the next. For a home loan, your lender usually uses the median of the three scores. Scores range from 300 to 850 points. In 2019, the average credit score hit a record high of 703

Why Your Credit Score Matters

The purpose of a credit score is to provide lenders (and others) with an idea of how likely you are to repay a loan. A good credit score will indicate to a lender that you are a safe bet and make it much more likely that you will qualify for a loan. It indicates that you are managing your debt obligations and may even win you more favorable terms on your loan. A lower score, on the other hand, can make it difficult to secure a line of credit. If you are able to qualify for a loan, you may have a higher interest rate than someone with better credit. However, while a score of 620 is often the lowest a lender will accept, there may be alternatives to help you get approved, so don't give up just yet if your score is low. Your FICO score "weights" various factors concerning your credit to determine your rating. Below is the information FICO uses and the degree to which each will influence your score: Your credit history: 35%. This is comprised of your late payments and past due amounts, bankruptcies, defaults, and on-time payments. Your credit use: 30%. FICO looks at how many accounts are open in your name and your unpaid balances. Age of your credit accounts: 15%. How long accounts in your name have been open and your record of paying on time will impact your score. Types of credit you've used: 10%. Managing several different types of loans well — such as installment loans (car loans), revolving credit (credit cards), and mortgage loans — can impact your FICO score positively. Your new accounts: 10%. While opening and using new accounts impacts your score, multiple inquiries from businesses of the same type in a short period (such as when you shop for a car loan) do not. Be sure you request your free annual credit report from all three credit bureaus and review them for errors or misinformation. Knowing where your credit stands can help you determine when you are ready to buy a new home.

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