Impacts of your credit ratings on the future

Many people have no idea about the credit system let alone their credit scores. Well this is until they try to purchase a house or start a business. A credit score is a three digit figure that lenders use to rate their customers. The score determines whether or not you will get mortgage or any other kind of credit and the interest charged. Everyone has their own score. Individual score is scrutinized even in cases of joint credit applications. A bad credit score can be quite costly. First it would mean that you are riskier therefore making it hard for lenders to give you a loan. The loan will most likely attract a higher interest charge if at all it is approved. To understand the credit system you can request for your scores through www.annualcreditreport.com. The score ranges from 300-800.The higher your score the better for your ratings and credit terms. The credit scoring system is called FICO and was developed by Fair Isaac Corporation .The are three major credit bureaus; Equifax, TransUnion and Experian use the FICO model for their systems .Despite this each scoring system uses a different model of statistic therefore you will find that your score from each of the bureaus will not be similar. Your credit status therefore depends on which bureau the lender turns to. According to Experian’s National Score Index the average in April 2012 was 687.Reginal performance was between 669 to 700.A score of above 720 is considered good and will have you get favorable interest and credit terms. How your credit score affects your terms. Suppose you took a mortgage amounting to $200000 payable in thirty years. With high scores of 760-850 the lender might charge 3.682%. Per month you will be required to pay $919. On the other hand low scores of 620-659 attract higher interest example 5.271.Monthly it adds to $1040.This means that you will have a difference of $121 per month just because of a bad credit score. Calculate that for thirty years and you have $67,853.

Calculating your score

Fair Isaac takes an average of five components. Payment history accounts for 35%, credit is 30%, length of credit history is 15% while type of credit and new credit each contribute 10%. Payment history gives previous records on payment of credit obligations. This includes credit cards, loans and mortgages. Public records which show bankruptcies or liens are also considered. A history of timely payments helps to improve your score. Amount owed shows your credit obligations and if you can meet payment of these debts. High outstanding balances negatively affect your score. To be on the safe side never exceed 30% of the limit on a credit card. Paying a loan on installments demonstrates debt management thereby favoring your score. Length of credit history reveals how long you have been in debt. A history of responsible credit management for example timely payments will make you look good. This is because lenders will be able to see commitment through your repayment pattern. Type of Credit shows the different types of credit you access. Examples include credit cards, installment loans, mortgages and finance company accounts. This information will show whether or not used these credit facilities wisely. New credit shows that you had made inquiries on securing another loan. Opening multiple credit accounts within a short span of time is riskier especially if you lack an established and long credit history .Anytime you apply for a new credit account that inquiry is considered as ‘hard hit. A mortgage or car loan attracts multiple inquiries. However within 14days these inquiries will be regarded as a single hard hit. Numerous applications within short periods regarded as multiple hard hits which lower your score. Soft hits which include personal request for credit reports has no effect on the score

Benefits of good credit ratings

Good credit management results to a higher credit score which generally makes you secure loans at relatively lower charges. Rule of the thumb is to live within your means. This means paying your bills on time and using your debt wisely. These are smart financial measures that will not only improve your credit score but also save you so much money when securing for further loans.

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