Credit Score Explanation

Acquire an understanding of the credit score system and stratgies to help you raise it. To provide a simplified credit score explanation and how it can effect you begins by going back to your old school days and that dreaded report card.

The scores on your report provided an evaluation of how well you were performing in the subjects you were studying. Good grades could determine if you go to a good college or university or end up in a dead end job. In a way the report card ultimately determined your path in life. The credit score has a similar effect on your financial direction in life and it is very important you understand it.

Today, consumer credit makes up a large part of our daily lives. We use it to buy auto cars, homes and clothes. However, lenders who provide it need to be sure when they lend us money that we have the ability to pay the loan back with interest on top. To determine this a bank will use a variety if indicators and other variables to calculate your risk level. If you have a poor history of paying back your debt you will be given a low credit score.

To determine your risk lenders use the FICO credit score scale that ranges between 400 and 800. Obviously 400 means a very low score meaning the greatest risk. If you need to raise your score you should aim for 700. A low score can have serious implications that can limit your access to credit and higher interest rates.

If you have a low credit score there are ways that you can increase it. The lenders use a number of variables to calculate how risky you are. Each of these variables are given a level of importance to determine your Fico score. The following credit scores explanation outlines each variable its importance and strategies to improve it:

Payment history

level of importance: 30 to 35%

Strategy: If you make late payments on your mortgage or other bills this can have a big impact. Therefore get into the habit of paying your bills on time.

Level of Debt

level of importance: 30%

Strategy: If you have more debt than savings then you need to balance this. As a ratio reduce your levels of debt to 30% compared to your credit.

Credit History

level of importance: 15% to 18%

Strategy: The longer your credit history the better. Continue to increase your levels of credit responsibly.

Applying for credit

level of importance: 10%

Strategy: Reduce your applications for new credit. If you already have several credit cards pay off the balance and cancel them. You really only need one or two maximum.

Other factors:

level of importance: 10%

Strategy: vary the types of credit you apply for. Rather being dependent on a specific finance spread it over home loans, car loans, etc.

This credit report score explanation can be used as guidelines for you to follow diligently to help raise your score. However, this will not happen over night. If takes focus and discipline, getting into debt is habit as is getting out of it. If your debt exceeds your income you would need to consider using the services of professional firms that can provide debt management, debt consolidation and counseling solutions to help you. Ensure you do your research and only choose a service that is reputable.

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