The exact details of how a credit score is arrived at is top secret, but it is still crucial to increase your score based on the public information available. This article is all about credit scores and why it is important.
Without a good credit score, you can’t get a loan or any type of credit. The higher your credit score is the better your terms will be when applying for any type of loan. Even credit card companies will not issue you a card unless you have a good credit score.
A score in the vicinity of 720 or better is considered excellent, while a score below 620 is poor. If your score is in the 300 range, start looking for a co-signer when it comes to loans or seek out companies that are willing to take on high risk customers at a high rate of interest and added fees.
Who Decides Credit Scores
The Fair Isaac Corporation (FICO) system of credit scoring is considered the most accurate and the most highly respected by lenders. The agencies Equifax, TransUnion and Experian, who are consulted by most lenders for credit score reports, each have their own system of calculating credit scores.
These agencies take into consideration your past credit history when arriving at a credit score. They consider how timely your payments have been made, whether you have gone through bankruptcy or whether legal action has been taken or is pending against you. Even opening multiple accounts over a short period can be detrimental to your credit score. Trying to improve your score by closing an account in order to remove it from the scoring system does not work.
How Effective are Credit Scores?
Research shows that credit scores are accurate in assessing future performance and reliability in credit and loan agreements. Lenders encounter fewer loan defaults by using credit scores to determine creditworthiness.
Customers seeking loans or credit have found that higher credit scores give them more clout. Interest rates are lower and they encounter fewer added fees. Transactions are smoother and less time consuming.
Research also shows that if lenders base loans on a strict adherence to credit scores, lenders themselves are more likely to generate a greater margin of profit because of the reliability of their customers and the interest garnered from timely payments.
The Bottom Line
No one can escape credit score reporting agencies, and no one can manipulate them. So keeping a high credit score, if you intend to get any type of loan or establishing credit, should be a priority. You cannot even get a college loan without a good credit score, and forget about opening a business with a poor credit score.
Your life is not over if you have a low credit score. You can always get a co-signer when it comes to getting a loan, or you can apply to lenders who make their money from high risk borrowers who agree to pay a higher interest rate with more and steeper fees.
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