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Credit score basics

ForSaleByOwner August 30, 2023

When you apply for loans, mortgages or simply a credit card your credit scores are one of the most common things a lender will use to determine their approval decision and the interest rates they will offer you. This number might not appear very important but if the credit scores are understood and managed properly you can save hundreds or even thousands of dollars very easily.

To start with, let us consider what a credit score actually means. In simple words, it is an evaluation of your credit history. Very complex mathematical formulas are used to calculate this figure. Your debts, credit history, your most current payment history and other elements of your credit report are taken into consideration for the preparation your credit score. You actually have three credit scores, one based on the Equifax report, another on Experian and the last one by TransUnion. You may see mild fluctuations with your credit score (usually 40 points up/down) depending which credit data and scoring model is used.

Mainly businesses use your credit score to make sure they are not at a risk of losing money by lending you the same. Generally credit scores stay in the range of 300 to 850. You get the best possible deals and lowest rates with a good credit score (usually more than 650). It is normal to notice fluctuations on your credit score whenever something changes in your credit report.

To take advantage of a good credit score, we must know what makes it rise or sink. To save your credit score from going low, you must not pay your bills late or have an unusual number of accounts, that is, you shouldn’t have either too many accounts or very few accounts. Other factors which can negatively impact your credit score are maxed out credit cards, short term credit or if you apply for too much credit.

On the other hand, you can increase your credit score by paying every bill on time and have at least 3 to 6 active credit accounts. You should avoid applying for too many new credit accounts. While it’s good to have a stable record of credit use, low credit card balances help a lot. It also helps if you have 1 to 2 loans that show a consistent on time payment history.

There is also a very popular rumour which says that you can lower your credit score by checking your own credit reports. This is a myth and you are free to check your credit reports and credit scores as frequently as you please with no fear of dropping your credit scores or damaging your credit in any way. In fact, not knowing your credit score and what is on your credit report can be very damaging due to the recent rise in identity theft. Experts recommend that you check your credit reports and credit scores every 6 months to a year, and before any major purchases, for any inaccuracies and to ensure the best rates.

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