by: John R. Blakefield
What is a credit score? Every one puts such a huge importance on your credit score. Why is this credit score so important? And how is it determined?
Your credit score is based on many variables that are dependent on your repayment history and the amount of money loaned out to you. Your credit, or more appropriately addressed as the ability for you to pay back the money that has been loaned to you, whether it be through a credit card, mortgage, home equity loan, car, RV, boat, motorcycle, rental apartment or town home, or just about anything that involves you paying back money on credit terms for the items you have purchased or pay for on a monthly basis.
When your credit score is accumulated, each item is passed through a system where points are either awarded or deducted based on the status of the terms. For example, if you have a specific amount in a loan, and you are paying consistently and on time, then you will be awarded points. However, if you are late on payments, and have many credit cards close to maximum, perhaps have not made every payment quite on time, then you will have points deducted.
The computer program evaluates the awarded points and deducted points to come to a total. This total can range from around 330 to the lower 800's. This score is used to evaluate the lender's risk of you making your payments and making them on time.
There is usually a clear relationship between those with a higher score and those with a lower score. Those people with a higher score, above about 680 are capable of paying back the loans that they take out. However, those who have a score below 680 are less capable of paying back their debts on time.
Lenders use this information to determine the terms of your mortgage when buying a home. If your credit score is up to par, you can expect a lower interest rate, shorter terms, and less fees. However, if your credit score is below the average, then you can expect to have a higher interest rate, more fees, and possibly more expenses that are associated with the lender taking a greater risk with a person that may not be capable of paying back the mortgage in a timely manner.
So, as a result your credit score is a huge influence in how a lender determines the mortgage terms that you can qualify for. Because of this, you should try to increase your credit score to the best of your ability. This means paying back loans, paying on time, and paying down any credit card debt that you possibly can, especially that which exceeds 50% of your maximum limit.
There are many things that actually affect your credit score. Keep in mind that if you pay on time and are on top of the debt that you have, having some debt and credit is a beneficial thing. If you can prove that you can handle debt, and pay on time and towards the principal amount, then you will not have as many problems.
If you have too many delinquencies, a short credit history, too many revolving accounts, too few revolving accounts, balances that are close to maximum, too many accounts, and of course major problems such as tax liens, judgments and bankruptcies, then you can expect your credit score to be lower than average.
In order to repair these credit issue to get the mortgage rate that you deserve, be sure to handle any debts or payments that might deduct points from your score. Pay above the minimum, on time, and you will quickly see your credit score increase as the problems are resolved.
The basics for having a decent credit score is to not have too much debt, pay your debt on time, and not have too high of interest rates! If you feel you need to correct some issues on your credit score, then do it! You can end up saving thousands of dollars!
