This is the first post in a five-part series designed to help you raise your credit score. Over this week, I’m going to condense what you must know about managing your credit into one simple guide.
Why?
Because a understanding how credit scores work, and therefore, having a good score can save you lot of money. In insurance, a good credit score and history can mean paying less for home and auto insurance each year.
Let’s begin…
Your credit score, also known as your FICO score, is a number between 300 and 850. The higher the number, the better.
The purpose of this number is to make it easy for lenders to determine if you’re worthy of a loan. In seconds, by looking at your credit score a lender decides if they’ll lend you money.
More importantly, your credit score helps determine the interest rate you pay.
Besides having to pay less in interest payments each month other advantages to having a high credit score are:
- Easier to find a lender
- Easier to find a place to rent, since landlords look at your credit score
- Lower insurance premiums
Disadvantages of Having a Low Credit Score
- Higher interest rate when borrowing money
- Difficult to find a lender
- Difficulty finding a landlord who will accept your credit history
- Higher insurance premiums
Credit Score Formula
The Fair Isaac Corporation (aka FICO), the company who determines your credit score, hasn’t released the exact formula for calculating your credit score. What we do know is what factors go into determining your credit.
photo from: MyFico.com
The five factors a long with their weights are:
- Your Payment History = 35%
- Amounts Owed = 30%
- Length of Credit History = 15%
- New Credit = 10%
- Types of Credit Used = 10%
