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When you apply for credit, whether it’s a credit card, car loan, or a mortgage, lenders want to know whether you are likely to repay your loan and make the payments on time. To determine if you are a good credit risk, lenders examine your credit score whenever you apply for credit. Your credit score is an important factor in determining whether creditors will approve your credit application and, if you are approved, the cost of your loan. Other factors that can affect your credit application include your income and employment history.
Your credit score is calculated based on information in your credit report, which is a profile of how you manage your credit (loan) accounts. Your credit report details how many credit accounts you have, how much you owe, the amount of your credit limits (primarily applies to credit cards), when you opened the credit account, your repayment history (including late payments), and certain public records (for example, a bankruptcy filing or a tax lien). Each of the three national credit bureaus (Experian, Equifax, and TransUnion) maintains a credit report about you.
Your credit report is updated once a month by each of your creditors (for example, your credit card issuer, car loan lender, or mortgage loan lender), who provide information to the three credit bureaus about your loans. Your report is also updated regularly based on any new negative information obtained from public records that indicate an increased credit risk (for example, a bankruptcy, lien, or judgment). Consumers with a high credit score are likely to pay back their loans in full and on time, whereas consumers with low scores are likely to carry a high risk of default.
The information your creditors provide to the credit bureaus affects your credit score. For example, if a creditor reports that you made a late payment, it’s likely that your credit score will drop.
Most credit scoring models consider the following factors when calculating your score:
In calculating your credit score, most credit scoring models assign a higher weight to your payment history and amounts owed than to the other factors. These two factors will, therefore, have a greater effect on your score than the other factors. But it is important to try to do well on all of the factors so you can maximize your score.
Here are some important tips to increase your credit score:
Your credit score is presented as a number that can fall within a range — usually from 350 to 850. However, some credit scoring products use different ranges — such as 501 to 990. If you obtain multiple credit scores and the same range was not used, you cannot directly compare the scores. For example, a credit score of 720 within the 350 to 850 range is not the same as a credit score of 720 using the 501 to 990 range.
Maintaining a high credit score is important because this is one of the factors that determine whether you will be approved for credit and the cost of your loan. Applicants with high credit scores typically are offered lower interest rates and better terms and conditions than applicants with lower scores. A low credit score reduces the chances that your loan application will be approved. And if it is approved, you will likely pay a higher interest rate for the loan than a borrower with a higher credit score.
If you apply for credit and are denied, you have the right to obtain a free copy of the credit report the creditor used when denying your application. You should obtain a copy of the credit report to make sure that it is accurate. If you find inaccuracies, you should file a dispute with that credit bureau. Here are the phone numbers and websites of the three major credit bureaus:
Federal Reserve Bank
Public Affairs - Publications
P.O. Box 66
Philadelphia, PA 19105-0066
Brochure revised 10/2012