Know and Understand the Importance of Credit Scores

According to Federal Reserve data, the total debt of Americans is approximately $252 billion. However, most Americans do not have sufficient knowledge about credit information. They do not know how the credit scores are being calculated, what are the information in the credit report and the effect of good score and bad score in their financial well-being.

The Consumer Federation of America’s survey of 1000 Americans showed that only 25% are aware that generic credit scores can be availed from various resources aside from the three big credit bureaus. And about 30% to 40% do not know that their marital status and age do not count in the calculation of their credit score.

To analyze credit score is not easy even if you review it more than once in a year. No matter who is doing the calculating of the credit score, the factors that are being considered are the same .The complexity is in the weight that each factor contributes because it is variable. It is not simple to determine what is “good” score and “fair” score.

Here are some of the frequently asked questions and answers:

Q. How do you define a credit score?

A. A credit score is a measure used by creditors to evaluate your credit worthiness or your capacity to repay a debt. It is a three digit number that creditors issue.

Q. How do they calculate the credit score?

A. Information from credit report are gathered by credit bureaus and feed it to algorithms to calculate the credit score. This information is taken from many sources like the credit card issuers, companies that grant mortgage, auto lenders and others. The information includes the way your bills are paid whether it is delayed or on time; how long is the credit history; amount of credit used compared to the remaining amount available; the type of credit accounts and how many times did you apply for a new credit card lately.

Q. Why is there more than one credit score?

A. There are many sources of scoring models for the calculation of credit score. FICO and Vantage are the two most popular scoring models. FICO’s score ranges from 300 to 850 while that of Vantage ranges from 501 to 990. The consumer’s credit score will vary and it depends on who does the calculation. The score you get when you request from an agency is not the same as the score the lender gets when he requests from the same agency.

Q. What is the indication of a “good” credit score?

For FICO scoring model, a score of 700 is considered high. With this credit score, the consumer is credit worthy and may qualify for a lower interest rate for a loan. Vantage scoring consists of a number and a letter. From 700 to 799, the letter score is “C” which is considered by lenders as an average score. A score of 800 to 899 is equivalent to letter “B” and 900 is an “A.”

Q. How can I consistently monitor my credit score?

A. You should request for your credit score once a year to keep track of it but you have to pay for it. There are many cost effective ways to get your credit score. The credit report however, can be availed of for free once a year from the three major credit bureaus but this does not include your credit score.  It is very important that you properly monitor your credit report in order to get a high score which will give many advantages for your future financial transactions.

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