Have you ever wondered what those credit score numbers mean and what is considered good or bad? The truth of the matter is that the meaning is fairly ambiguous. The bureaus have a complicated formula in which they use information provided by the entities with which you do business to compute a score of your creditworthiness. In other words how big of a risk the lender will be taking. To make it less clear, each lender has different methods of interpretation and standards as to what they believe to be acceptable.
Scores range from about 400-850. While 850 is the highest rating; anything above 800 will get you the best rates. Seven hundred and above is still considered good and you will enjoy decent rates and access to funds. Generally, 620 and below is considered to be bad. At 620 you will be limited by the amount of funds a lender will be willing to extend. If you find someone willing to take the risk, they will generally charge exorbitant fees and interest rates, with possible balloon payments, along the way.
You don't get a damaged history by making one late payment or two. Your three digit number will start seeing significant drops when there are patterns of negative behavior. The marks on your report that can have the most significant negative impact are charge-offs, debt collections, bankruptcies, foreclosures, tax liens, and lawsuits or judgments. If these items are appearing and they are not accurate, you must fix them immediately by submitting a dispute to both the reporting agency and the company that provided the information. If they are correct and you must wait for them to naturally fall off your record, most items will take 7 years, but a bankruptcy will stay for ten.
Lenders are not the only ones who use your FICO number. Insurance companies will use it to determine your rates and future employers may use it to determine your eligibility for employment. It can also be used for review when a lender is attempting to collect on an account and the underwriting of insurance, as well as for a business transaction that you initiate. Lastly, it can be used by a government agency that is required to consider your financial responsibility to determine eligibility for a license or other benefit. An example of this is a security clearance required to access classified government information.
Having a low score can have a significant impact on your life but you do have the power to increase this. Make your payments on time, every time, for all of your accounts. It is very difficult to have a history of chronic late payments removed from your record, but lenders place more weight on recent activity. If you can show that you have taken control and are responsibly handling your finances and upholding your end of the agreements, they will look upon you more favorably in terms of risk.
Besides a strong payment history, one of the most important things you can do is pay down the high balances on your Visa or MasterCard. A good rule to follow is to keep balances below 30% of the limit. If you have a $10,000 limit, for example, you never want to let your balance get above $3,000. Many companies will allow you to set up an alert when you are getting close to reaching this threshold.
For more about bad credit and how you can remove these items to earn a better credit score visit us or you can get a free consultation by calling 800.232.2903
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