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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. Generally, 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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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 (888) 301-0584 for a free evaluation.

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