A credit rating is a number derived from the information gathered about a person's credit history. It includes things like how much you owe, how long you have had credit and whether you pay your bills on time. Any time you apply for credit, a lender can access this score to determine whether or not to grant you credit and what rate they will charge you for it.
Credit Reporting Agencies
There are three major credit reporting agencies: TransUnion, Experian and Equifax. Each of them use a formula to calculate an individual's credit score. Every time you borrow, and every time you make a payment, it is reported to these agencies.
A Good Score
A credit score usually ranges from 300 to 850. Higher numbers indicate a better credit history. A higher credit score can mean lower interest rates on loans and may result in significant savings. Money-zine reports the average American scores around 692, but most lenders offer the best rates to clients who score above 740.
Figuring the Credit Score
Credit reporting agencies look at how long you have had credit, how well you make your payments, how much you owe in comparison to how much credit you have available, and how many times your credit history has been accessed by potential lenders. Each agency uses a proprietary formula that is not available to the public to calculate the score.
Credit Score is Key
Your credit score is the key to whether a lender will consider you a good risk for credit. A higher score will earn you more favorable attention from lenders than a lower score. Often a lender who extends credit to someone with a low score will charge exorbitant interest rates to mitigate their risk. A poor score can cost a borrower hundreds or even thousands of extra dollars over the life of a loan.
Keeping Your Score
In order to have a good credit score, you must manage your money carefully. Young people should be encouraged to begin developing credit early because the length of time a person has credit increases his score. Credit cards balances should be kept to a minimum and payments made on time. Using credit wisely will ensure a good credit score.
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