Acquaint yourself with credit score

By Skyden Dredge, 19th Jul 2012 | Follow this author | RSS Feed | Short URL http://nut.bz/2ubqr2gj/
Posted in Wikinut>Business>Accounting & Finance

Credit score is very important in personal finance. You must put in serious efforts to improve your score.

Acquaint yourself with credit score

Credit score plays an important role in personal finance. Credit score is a number which reflects the creditworthiness of a borrower. This numerical figure shows the likelihood whether or not the borrower will be able to pay off his or her debts. Different lenders such as banks and other financial institutions take this figure very seriously. Lenders use this number to evaluate the potential risks associated in offering a mortgage loan to a borrower. Credit score is based on your past credit history and it can vary between 300 and 850. High credit score implies that you are more credit worthy and low score means that you are less credit worthy.

The most widely used credit scoring system in the country is FICO (Fair Isaac Corporation) score. FICO provides credit score models to financial institutions. You can maintain a good credit score by not having too much debt and by paying your bills on time. If your credit score is less than 600, you will not be eligible for a prime mortgage loan but you may be eligible for a subprime loan which entails comparatively a higher rate of interest. Anyways, you as a borrower need to know certain things related to credit score, which are listed below.

Credit score is not unique

The Fair Isaac Corporation sends credit score to the lenders. Lenders customize the score in line with their system and so the scores provided by different lenders differ. Again, each of the three credit bureaus – Experian, Equifax and TransUnion – has its own credit scoring model. Credit scores calculated by different credit bureaus vary to some extent.

Different credit score ranges and different scales

The FICO score ranges between 300 and 850. If you have a score around 760, you will surely be able to get approved for the best mortgage loan. Anyways, with a score above 720, you will be eligible for the majority of the mortgage loans. Another type of credit scoring model which is frequently used is the VantageScore. The credit score provided by VantageScore varies from 501 to 990. If you have a score of more than 900, you will be eligible for a mortgage loan at the cheapest rate.

Check your credit

It is recommended that you must check your credit on a regular basis. You can request free credit report once in a year from each of the credit bureaus. Free credit reports from the credit bureaus – Experian, Equifax and TransUnion – will help you assess your financial situation in a better way.

Try to maintain a good credit health

The credit scores provided by credit bureaus show your creditworthiness. Put in serious efforts to improve your credit situation. You must try to maintain a low credit-utilization ratio. Credit utilization is the amount of debt in comparison with your credit. A history of paying your debts on time helps you maintain a low credit utilization ratio.

The above discussion will help you get a good understanding on credit score. With a good credit you can take out a mortgage loan with better terms.