The Credit Camp

FICO Credit Score Explained

It is a common misconception that you will be approved for a car loan as long as you have a good job so that you can afford the payments and if you have money for a down payment. Automobile finance companies and other lenders consider other factors when deciding whether or not to grant you a loan. One of those other criteria that they consider is your FICO or credit score.

Credit Rating

So having money and having a high salary does not guarantee that you will get the car loan you want. Your average credit score play a significant role when adjudicating credit and it is reviewed by everyone from banks to credit card companies. They use this numerical representation of your previous borrowing history to try to determine how likely you are to pay back a new loan, on time as agreed. This number is also sometimes referred to as your credit rating.

If you were late on payments in the past or you have missed any completely, this will negatively impact your credit score. The more serious the infraction the greater the effect it will have and the lower your score will be. If you have defaulted on any loans, had a vehicle repossessed, or declared bankruptcy then you will consequently have a very low credit score. The lower your score the more difficulty you will have when you go to apply for credit in the future.

Credit Bureau Reports

Each month, banks, credit card companies, automobile finance companies, and other lenders send a report to the credit reporting agencies such as Equifax, Trans Union and Experian, to advise them whether or not you paid your loan or credit card as agreed. These credit reporting companies consolidate the data and maintain a single record on all borrowers. That way when a new loan application is received by a lender, they can ask for a copy of this report. While past behavior is not a guarantee of how one will behave in the future, it is the best the creditors have to go on.

In addition to affecting your likelihood of approval, your credit score will also impact what interest rate you will be given. If you have honored all of your loan agreements and made your payments on time then you will have a high FICO score and you will be rewarded with a very low interest rate. Of course the opposite holds true as well. If you have a low score, but manage to still get approved for a loan (perhaps with a co-signer), then you can expect to pay a very high interest rate.

Other companies may use your credit score before approving you for their product or service as well. These can include utility companies, cell phone carriers, landlords and property managers.

How to Boost Your Credit Score

The average credit score ranges from 350 to 850. Having a score in the high 600’s to the low 700’s would be the least acceptable to be considered “credit worthy” by lenders. Of course you want to do everything in your power to boost your credit score and keep it as high as possible.

The first step to boosting your credit rating is to pay all of your monthly bills and debts on time. This means that when you receive a credit card statement and it has a “due by” date on it, then you must have your payment in their hands by this date. This is not the date that you can put your check in the mail, but the date by which the must have received it. Don’t wait until the last minute and risk your payment being considered late.

Make your payment even if the amount seems small or insignificant. I have seen clients who would receive a credit card statement with a $100 balance. The minimum payment would be $10. They would not bother making the $10 payment because they planned to pay off the whole amount the following month. While this may appear to make sense, the reality is that they credit card company would report that the borrower failed to make their monthly payment that month. Even though the payment was so small, it still counted and the customer’s credit score took a hit. All for 10 bucks.

Your credit score determines how easily you will be approved for credit and what interest rate you get if you are. It is a numerical summary of all of your past credit behaviors. If you want to get the best credit score possible or simply give your credit score a boost, make your monthly payments on time and do not overuse your available credit by maxing out the available balances.

Getting a copy of your online credit report is the first step in taking responsibility for your personal financial circumstances. Whenever you apply for a loan, mortgage or student credit card the lender will do a hard or soft inquiry with one of the three credit bureaus: Equifax, Trans Union or Experion. They will review how long you have had your various accounts open and whether or not there have been any late payments. They also consider how close your balances are to their respective limits.

This information is tabulated and converted to a number known as your FICO score. They then use this rating to determine first of all if you can be approved at all and then secondly how high your interest rate should be set. With so much riding on the information held by the bureaus, it is critical that it be as accurate as possible. Ordering a copy of your credit report online is the first step in ensuring that it is.

Banks love strong borrowers with a clean credit history. They will practically throw money at them with favorable terms and low interest rates. Knowing for certain what has been reported about you gives you a chance to correct any mistakes or other inaccurate information. It does happen that two individuals with the same name in a small town will inadvertently have there credit reports mixed up. The sooner these types of problems are identified the easier they are to fix.

As you sit here reading this picture in your mind what you think your FICO score is. Then when you review your online credit report compare how close you were. If your credit rating is higher than you thought, you are obviously doing the right things, like making you payments on time and not over utilizing your available credit. If you score is lower than you expected, take some time to really understand why. Then make the necessary changes in your behavior to raise your score and start reaping the rewards that go along with it. If you do find a mistake when you check your credit report online, be sure to get it corrected as quickly as possible.

It’s true; highlimit credit cards can boost your credit score!

There are more reasons to get a highlimit credit card than simply being able to rack up a ridiculous amount of debt. In fact the limit of your credit card can have a significant impact on your average fico score. This is because the ratio of your outstanding balances to your available credit is one of the factors used by the credit bureaus to determine your credit score. Therefore if there are two individuals with the same amount owing on their credit card but one has a higher limit than the other, all other things being equal, that person will have a higher fico score.

No one knows for sure what the tipping point is for balance owing vs. credit limit, but obviously the smaller the percentage owing the better. This is a good reason to apply for the highest limit credit card you can get. This assumes that you possess the self control to be responsible with that much borrowing power readily available. If you feel that you would tend to spend beyond your means, then this strategy for lowering your fico score would definitely not be a good idea.

As a reminder, the higher credit score you have the lower interest rates you will be eligible for. Anyone looking for debt relief will want ensure they are paying as little in interest as possible so that they can have the majority of their monthly payment go to the principal.

Of course having highlimit credit cards has its own rewards, including the ability to purchase big ticket items on the spot, without first having to go to your bank to apply for a loan. See the perfect deal on a vehicle you have been looking for? You can pay for it in full on the credit card and then determine afterwards, the most cost-effective way to structure the financing.

Also be aware that some lenders take into account the maximum credit that you have available when you are applying for a loan, so if you have a credit card with a really high limit it could inhibit the amount that you can qualify to borrow later on. So you want to find the right balance between a high enough limit that you won’t like utilize a large percentage of it, but low enough that it won’t get in the way of being approve for other loans later on.

Are you spending more than you are making and tired of keeping up with all your payments? You are not alone. It is a fact of life that most of us want immediate gratification and make purchases in excess of the funds we have in our checking accounts. Buying on credit is the way most of us do this. We take out loans or use credit cards to compensate for the the lack of cash on hand to pay for what we want to own right away. If it is a given that we do this, then the saying “if you can’t beat ‘em, join ‘em” applies and we might as well borrow this money as cheaply as possible. This is where having a better than average FICO score really helps you out.

When applying for credit your FICO score is very important. In fact this is often the deciding factor in whether or not you will be approved as well as whether or not you will get a low interest rate.

You should never ingore your FICO score or underestimate it’s significance. Right from the beginning it is very important to pay all of your bills on time and ensure your are meeting all of your agreed upon obligations. Nothing will lower your credit rating faster than being late or missing payments. The more responsible you are with the credit you have then the higher your rating will be and the easier it will be for you to get additional loans in the future at the best possible rates.

A high FICO credit score means that you are a low risk, and that your past behavior indicates that you are most likely to pay your accounts as agreed.

Credit scores have different ranges. If you have a score in the the low 500’s then you need to take immediate action to reverse your current behavior. You will have difficulty obtaining credit at low rates. If your score is above 700 then you should have no trouble obtaining loans and/or credit cards at very favorable pricing. If your cedit score falls somewhere in between your success will fluctuate accordingly.

Aside from the different ranges, the FICO credit score is split into five categories: payment history, length, amounts owed, new credit, and the credit type. These categories and how you measure within them have a direct correlation to your credit score.

Your credit report will have data such as what accounts, how many credit cards, whether or not you have a mortgage, term loans, unpaid accounts, collections and whether or not you have filed for bankruptcy.

However there are times when your credit report will contain errors. For this reason it is important to regularly get a copy from one of the three major credit bureaus and check for any inaccurate information. You then must take the required steps to have this information removed as soon as possible. Because if you do have a low FICO score, the sooner you know, the better. The longer it sits on there then the more difficult it will be to clear up.

The three major credit bureaus are Equifax, Experion and TransUnion.

Don’t settle for an average FICO score. This is your credit rating we are talking about and with so much depending on it you must take responsibility for it. No one else will do this for you.