Do you know your credit score? If not, you should check it out before you make any more loan applications or credit card requests. Credit scores range from approximately 350 to 850. Provided yours is over 680 you are considered a "prime borrower" and so will be offered the lowest interest rates on your loan. Below this figure and down to 560 you fall into the "sub-prime" group and have to pay a considerably higher rate. Below 560 you will have difficulty in getting any loan and, even if you do, it will be at an exceptionally high rate of interest. Your credit score is calculated using the FICO rating system which is named after Fair Isaacs and Co, the firm that devised the method. Five factors are considered in calculating the score, but some of these are more important than others. I have listed these below in order of importance. 35% Payment History. This is your record of payments where any late instalments or missed payments are recorded. As you can see this is the most important of the five factors making up your credit score so you need to make every effort to pay on time. 30% Amount Owed. This factor looks at the total outstanding balances on all your loans and cards and also the proportion of your approved credit that you are actually using. Someone who has several cards which are all near their limit will clearly have a lower score than a person whose outstanding balance is only (say) 30% of the approved credit figure. 15% Length of Credit History. Generally speaking the longer credit history you have, the higher your score. For this reason you should always think twice before closing an old account. 10% Type of Credit. Your score will be boosted if you have a variety of borrowings, eg mortgage, student loan, car loan, credit card, rather than just one or two. 10% New Credit. This factor looks at your recent credit history. This is where making a large number of applications can have a detrimental effect. However since this factor only has a 10% weighting, it is less important than sometimes thought. Awareness of the five factors that are considered in arriving at your credit score will enable you to make sensible decisions in handling your credit. |
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