Your credit score also known as the FICO score is one of the most important consumer scores that needs to  be taken seriously, especially if you plan on obtaining a credit card or loan, purchase a house or a car.  The score is used by lenders to determine  the credit worthiness of a borrower when he or she applies for a loan in the U.S. The score is utilized to assess how risky a consumer is before credit is extended to that individual.

 

Why is the credit score important?

 

One of the reasons why your credit score is important is because most financial institutions in the U.S use this score to determine what interest rate to charge you or whether to extend you credit altogether.  Managing your finances and credit history well, will go a long way in saving you a lot of money on interest that you will pay on a loan.

 

How is the credit score calculated?

 

The FICO score is calculated using several pieces of credit information from your credit report. The information obtained from your credit report is sorted and arranged into five categories, and then each category assigned a percentage weighting. The weightings are then used to calculate a numerical value ranging from 300 to 850. The higher your score the less of a risk you are to creditors.  The FICO score breakdown is below

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FICO Score Range

 

720 - up: excellent credit score

680 - 719: good credit score

620 - 679: Average credit score

580 - 619: Poor credit score

Less than 500 – Very poor credit score

 

How the credit score is interpreted:

                          

If your FICO score is high you are considered a lower risk to creditors and as result qualify for lower interest rates and favorable terms on some loans. The lower your FICO score the more of a risk you are perceived to creditors. If you are considered as a high risk consumer to creditors you might end up paying more in interest for loans, or might even end up being declined all together for some loans. Consumers with credit scores ranging from 720 and up qualify for the best rates and terms, while consumers with credit scores below 619 usually end up paying more in interest and sometimes unfavorable loan terms.

 

 

How do you repair your credit score?

 

Begin by following the steps below

 

1. Pull your credit report from the 3 major credit reporting agencies. The main credit reporting agencies are Experian, Equifax and Transunion. There are other reporting agencies but these three are the major ones.  Pull up your credit reports and go through them to ensure that all information that is being reported on you is accurate. If you come across any errors on your credit report call the reporting agency that is reporting that information to have that error disputed and fixed.

     By law you can obtain a free credit report once a year from www.annualcreditreport.com  so take advantage of it and sign   on to the site to obtain your free credit report. The report does not include a FICO score but you can access your score for fee.

 

 

1. Pay down the amount of debt you owe, especially on your credit cards, but do not close out the credit cards once they are paid down, this is because the formula used in calculating your credit score takes into account the length of time you have established a payment history on a credit card or other forms of debt. Closing your old credit card accounts with established payment histories erases that history and thus hurts your score. The amount of debt you owe makes up 30% of your credit score  calculation so ensure that balances on your accounts, especially credit cards are about 10-20% of your total credit. Stop adding more debt on your credit card because it hurts your score, especially if the balances on all of your credit cards exceed a certain percentage of your available credit.

 

 

1. Pay your bills on time, your payment history makes up 35% of your credit score and as a result missing a payment adversely impacts your score. Being thirty or more days delinquent on any of your debt that is reported to credit agencies will severely impact your score, and will stay on your credit report as negative information for seven years. The impact of the negative information on your credit report is minimized over time, as you maintain a good payment history.