These fixes will help you get better rates
A credit score tells lenders whether you're a safe bet when it comes to trusting you with credit. The number is an indicator of whether you pay bills on time and whether you have outstanding debt, so it helps lenders determine whether you qualify for a mortgage, credit card or loan, and for how much. We'll show you how to obtain your score and improve it so that you can get the best possible rates.
How your credit score is calculated
You actually have three credit scores, one for each of the three credit bureaus: Equifax, Experian and TransUnion. Each score is based on that particular bureau's information about your financial history, and as that info changes, so does your score.
Credit scores are also called FICO scores, because the scores are usually generated by software developed by Fair Isaac and Company. FICO scores have different names at each of the three credit bureaus, but they're developed using the same method.
Credit scores are calculated with information from five categories:
- Payment history (35 percent). If you've paid bills late, had an account in collection or declared bankruptcy, your credit score has taken a serious hit. Recent problems have greater impact than older ones.
- Amounts owed (30 percent). This area accounts for how much debt you have, what kinds and how close you are to your credit limit.
- Length of credit history (15 percent). Older accounts improve your score, because they indicate that you've been able to maintain good standing.
- New credit (10 percent). Opening a number of new accounts in a short time frame may decrease your score.
- Types of credit used (10 percent). Having a few different types of accounts (credit cards, retail accounts, installment loans, mortgages) has a positive affect on your score.
What's a good score, anyway?
Credit scores range from 300 to 850, and any score above 720 is considered a good score. If you have a score of 740 or higher, you will qualify for the best rates. On the other hand, if your score is 619 or lower, you will have a difficult time getting a loan or credit card, and if your score is below 559, it is unlikely that you will qualify for a loan.
Scores can vary from agency to agency, based on whether the information they have collected about you is complete and accurate. If there are varying scores, a lender will usually go by the middle score.
How do I find out what my credit score is?
Once every 12 months, you are eligible for a free copy of your credit report from each of the three national consumer reporting agencies. These reports show whether you pay your bills on time, have filed for bankruptcy and even whether you have been sued or arrested.
While you're entitled to free credit reports, you'll have to pay to find out your credit score. You can order your score from each of the three reporting agencies' websites.
To bump up your FICO score, try these tips:
- Dispute incorrect information in your credit report. If you find errors, complete the dispute form included with your report or write a letter to the reporting agency. In your report, identify the mistakes and clearly state why they are incorrect. Send photocopies of your report with the mistakes circled, and include copies of documents that support your argument.
- Pay your bills on time. Delinquent payments make a big dent in your score, so do whatever it takes to make sure that you pay your bills on time. Set up automatic debits and payment reminders so that you don't miss another due date.
- Minimize your debt. Pay off your debt as quickly as you can. Keep balances on credit cards as low as possible and pay off the debt, rather than transferring balances from card to card.
- Settle any debt in collections. Contact the collectors to negotiate a pay-off settlement. Make sure you receive the collector's agreement in writing before you send in any payment.
- Recognize that negative information will stay on your report for a while. Most negative information, if it is accurate, stays on your report for seven years. The exception to this rule is bankruptcy, which remains for 10 years.
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