Credit 101: How to calculate and improve it
Lenders use credit ratings in deciding whether or not to give loans or credit to individuals. Presently, TransUnion, Equifax, and Experian are the three main credit bureaus. The agencies use the Fair Issac Credit Organization (FICO) scoring method to determine one’s credit rating. FICO scores range from 300 (high risk) to 900 (no risk). These scores are calculated by the number delinquent payments, the size of previous lines of credit, the kinds of credit lines, how long the consumer has had lines of open credit, and the percentage of total credit that is currently being utilized. Many lenders refuse to extend lines of credit at 500, and even if they do, there are potentially high interest rates and difficult terms. Credit ratings over 850 will grant the consumer small down payments and low interest rates. A credit rating of 650 is generally good enough for the consumer to receive favorable terms though most consider ratings in the mid 700s to be optimal.
Good credit ratings come from amounts of bad debt, amounts of good debt, proven credit history, and the current debt to income ratio. Those with excellent credit ratings can qualify for loans with lower than prime interest rates, whereas people with good credit ratings can qualify for prime rates in loans. A good credit rating is somewhat ambiguous, as some feel that a score must be at least a 720, whereas others state that scores above 690 are all that are needed to require good loan rates. Because some banks and lenders are not always impressed by scores in the 600s, then it benefits people to learn what each lender considers a good credit rating before deciding where to apply for credit. In order to improve one’s credit rating, one should pay off credit cards, reduce the debt to income ratio, avoid accumulating more bad debt, and make payments on time.
Improve Credit Ratings
When a person attempts to get a loan or acquire additional credit, his credit is reviewed; thus, it is essential a person use various techniques to improve his credit rating when possible. First, it is important that everyone knows what their credit ratings are, as careful credit monitoring can protect people from identity theft. Federal law entitles everyone to receive a free credit report once a year from TransUnion, Equifax, and Experian. Reviewing these reports can make a difference for one’s score.
A person should limit his credit card charges to no more than 30% of the card’s limit because the credit reporting agency may be unaware of the limits and mistakenly believe the person routinely maxes out the card.
Cleaning up previous mistakes can improve one’s credit store. For example, if someone had made a late payment on a loan in the past year but was a good customer otherwise, the lender may erase the late payment from the person’s record, which in turn will make a person’s credit look better. Also, having numerous credit cards at one time may appear harmless but in fact can be misleading, as it may appear the consumer is preparing to live beyond his means.
For more information on credit ratings and CD rates visit www.cdrates.org