Understanding Your Credit Score

Your credit score is a numerical rating of your ability to manage credit. It ranges between 450 and 850 and basically rules your credit life. The higher your credit score, the more money you are likely to save when it comes time to borrow. Like your social security number, this number is forever yours; however, you have the flexibility to change it up or down and for better or worse. How and when it changes is controlled entirely by you.

Your three digit credit score holds an incredible amount of power. It can determine what you can buy, how much you can buy and what you will ultimately pay for what you buy. Your score even has a bearing on your insurability and insurance premiums. Before 2001 your credit score was unavailable to you. It was only accessible to lenders and other businesses that required that information to conduct their business. Now you can easily access your credit report through the three main credit bureaus, Equifax, Experian and Trans Union and in most cases at no charge. Understanding them is a bit more work.

If you think of your credit score like the grades on a report card, you start to understand that this score is a compilation of various components. Instead of attendance, test scores homework and class participation, a credit score is a combination of payment history, number of outstanding loans and credit cards, the amount of available credit in relationship to your credit cards limit, number of recent inquiries and the length of time your credit has been opened. Just as your final grade in each subject is based on a percentage of each of the components, so is your credit score.

Generally speaking, the largest component of your score is based on payment history. Lenders want to see that you pay your loan obligations on time. This score is lowered by the number of times you are 30, 60, or even 90 days past due. Of more serious consequence is whether debts needed to go to collection agencies, if you have any judgments against you, or if there are bankruptcies, foreclosures or repossessions in your past. While all of these factors will bring your credit score down and affect your future borrowing capabilities, time is on your side. Over time, these items tend to lose their punch provided there are no additional occurrences.

The next significant component is the relationship to outstanding credit card balance to the available credit card limits, in other words, whether or not you are maxed out on all your revolving credit card debt. Your score is negatively affected by cards that have balances exceeding 25% or more of their available limit. The higher the balances the lower your score, even if you’re paying on time. You should avoid opening new cards to pay off balances on existing cards because demonstrating more stability with fewer credit card companies hold more weight than having dozens of newly opened accounts with high balances.

Your credit score tells lenders how committed you are to paying them back on time and in full. As a matter of fact most lenders today will grant credit based on your score alone. The days of calling your employer and landlord, verifying your income and assets has moved into the electronic verification age. Computer programs are written to access your credit worthiness in seconds by accessing your credit score alone. Just like getting pre-approved for a $5,000 credit card, it is not uncommon to instantly get approved for a boat loan up to $100,000 based on your credit score.