What is a credit score and why is it important?
Credit scores are important because they are used by banks to assess an
applicants risk and determine whether to extend a loan and to calculate
the applicable interest rate. Having a good credit score is especially
important when someone is looking to obtain new credit, increase their
existing credit limits, and when applying for car loans and real estate
mortgages. Generelly, having a high credit score will increase the likelihood
of being approved, and furthermore, could result in an approval with preferable
terms as compared to a person with a negative credit score.
Credit Scoring Factors
There are a variety of different credit scoring models. Some of the factors
that are used in calculated a credit score are:
- Payment History. It is important to make sure that at least the minimum
payments are made on or before the specified due date. Late payments can
continue to report for up to 7 years.
- Credit Utilization. Having a healthy utilization can help increase a credit
score. For example, if you have 4 credit cards with a limit of $2500 per
account, then your total combined limit is $10,000. Now let's say
you have a balance on each of the credit cards in the amount of $1000,
with a combined balance of $4000. Your utilization rate would be 40%.
It's best to keep the utilization levels low.
- Length of Credit History. Have several accounts open for an extensive period
of time indicates to creditors a sense of stability and reliability. As
long as the payment history is positive, it is best to build an extensive
history. This can only be achieve as a matter of time.
- Hard Inquiries. Each time you apply for credit, a hard inquiry is placed
on your credit report, and will remain for up to 2-years. If a creditor
sees that many credit inquiries have been made during a limited amount
of time, they might think that the applicant is desperate for credit,
which may increase their risk, and consequently, can have an adverse effect
on the credit score.
- Public Records. Items such as tax liens and court judgments can appear
as an adverse public notation. These items can cause a significant drop
in credit scores, especially is left unpaid. Sometimes, a federal tax
lien could be removed by following certain procedures. Also, judgments
could be vacated under certain circumstances. A lawyer may be of great
assistance with respect to assistance with addressing public records.
If you need help correcting your credit, contact our law firm today at
877-717-0098 for a free evaluation.