Understanding The Factors That Create Your Credit Score

By: Jon Arnold | Posted: 09th November 2007

Today's financial market is very competitive, especially in the area of lending money. One of the best things you can do to position yourself to take advantage of that both today and in the future is to establish a great credit score. Nobody is born with a great credit score, it needs to be earned. But if this has not been an area of focus for you in the past or if you have stumbled on some speed bumps on your way there, that's ok because you can still take steps to bring you to having a great credit score.

First let's discuss a bit of brief background. A credit score is determined by each of the three major credit reporting agencies based on your credit history. The first thing you need to know about that is that these agencies do not share information between them, which means that none of them have a true and accurate picture of what your credit history really is. Further, it also means there is an excellent chance that your credit report contains errors, which will not get corrected unless you personally dispute them. And you cannot dispute them until you know what your individual credit report says from each of the credit bureaus.

Each credit bureaus calculates your credit score, sometimes also known as a FICO score. Your credit score is used by creditors to give them a pretty good idea of how well you repay your financial obligations, where that score ranges from around 350 to around 850. The formula used to calculate your score is very complex, but the most important contributing factors are:

Your repayment history. If you have repaid all your debts on time or have a habit of making payments on time, your score here is high. If you missed some payments or defaulted on some debts, your score here will be much lower.
Amount of credit in use. If you have credit cards or lines of credit near their limits or maxed out, this will provide a lower calculation. If you carry a balance at all, the best area to shoot for is about 25-30% of your credit limit.
Overall debt. If you have too much debt compared to your income level, it is less likely that you could make timely payments on a new financial burden. But if you have no credit or very little credit, then there is not enough information here for a lender to make a decision, which also lowers your score.

The best thing you can possibly do is create a realistic budget and live within that budget no matter what. In these times of instant gratification, it is sometimes way too hard to wait to get that new car or big screen TV even if that means stretching your budget to the breaking point, but in the big picture, not having other loans or credit cards where you default on the payment is more than a great trade off for your patience.

Having a great credit score is something you should focus on regularly, not just when you anticipate taking out a loan or making a major purchase. Get copies of your credit reports and that will be a great step in beginning to understand where you need to focus first.

For more insights and additional information about how you can Raise Your Credit Score as well as getting a free copy of your credit reports, please visit our web site at http://www.credit-help-center.com This article is free for republishing
Printed From: http://www.articlealley.com/article_243671_19.html
Back to the original article

Tags: habit, credit cards, debts, share information, credit score, credit bureaus, credit report, credit history, creditors, credit reporting agencies, lending money, fico score, financial obligations, major credit reporting agencies, three major credit reporting agencies, repayment history, speed bumps