A credit score is a mathematical operation which has three digits and it is generated using information which is obtained from your credit report. The result score determines if you qualify for credit or not. The credit score is specifically designed to predict how risky it may be to lend to you.
Lenders such as credit card companies and banks use credit scores in evaluating the risks of lending money to a consumer. In addition, it is also used to calculate losses due to bad debt.
Among the many credit scores which exist, there is one known as FICO which dominates the market. In the United States, the FICO score is used in 90% of all the financial institutions. FICO scores range from 300 to 850 in which the higher figure indicates lower risks for the lender..
The Importance Of Your Credit Score
Your credit score is one of the important parts of your financial life. Throughout your life, your credit score will have an impact on you. Here are a few examples to show the importance of having a good credit score.
If you have a low credit score, it will be more difficult to get finances from banks or a credit company. Credit scores goes beyond that. In fact, your credit score can determine your rates for insurance and even effect your future employment or housing.
Using your credit score, insurance companies look at it to help determine your premium. Insurance companies create what is referred to as insurance score. This is mainly based on your credit score and some other factors.
A poor credit score can cost you hundreds of dollars per year while a good credit score may qualify for you for a discount.
Employers May Check Your Credit Score
Employers will sometime check the credit ratings of prospective employees. The argument based in this fact is that employers want to determine how responsible an employee may be. However, there are situations where bad credit may be caused by something which cannot be controlled by an individual.
Credit Reports Verses Credit Scores
The two words have different meanings. Therefore, it is significant to understand the difference between the two. A credit report shows detailed information of your credit history. Normally, it contains: current information, delinquent payments, balances, personal identification information and inquires and bankruptcies. The credit score is a number which is generated from the information on your credit report.
Bankruptcy Impacts Your Credit Score
One of the fears which people have is the negative impact on your credit score if you have to file for bankruptcy. One question which you might ask yourself is – Will my credit score get trashed forever? Credit has becoming part of our lives. Nowadays living without credit can cause inconveniences. People are afraid of losing their credit. As people struggle with their debts, they will end up filing bankruptcy.
Applying For Credit Can Have An Effects On Your Credit Score
It is possible that applying for many credit accounts can have an impact on your score. If you try to open a whole bunch of new credit card accounts, this looks more risky to the lenders. As a result, your FICO can be dinged if you have been applying for various credit lines within a short period of time.
How Credit Inquires Effects Your Credit Score
Generally, there is a small impact on your FICO score when a person inquires about credit. Basing on the statistics, people who have applied for six inquires or more on their credit reports are likely to declared bankruptcy in the future.
How Your Credit Score Effects You
Suppose you want to borrow $200,000 in a fixed rate and you have a high credit score ( 760-850), you will have to pay 3.623% loan interests to the lender. This means that you will have to pay $912 per month. However, if you have a low credit score (620-639), the interest rate will be higher than the high credit score. Therefore lenders might charge you 5.212% interest rate. As a result you will have to pay $1,100 per month. This shows that it is good to have the best credit score you can because the lenders will charge you low interests rates.
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