Is
Your Credit Score Killing Your Loan Chances?
Credit score? You didn't know you had such a thing,
did you? Many people don't, but your awareness of this
all-important credit evaluation tool can literally
make or break your chances of securing a loan.
In its most basic form, your credit score represents
your creditworthiness in the form of a number. Lenders
use this evaluation when determining the risk in
lending you money, whether or not to grant you credit,
how much credit they should grant, and what interest
rate to charge.
A variety of factors are considered during the
calculation of your credit score such as:
* how much money you earn.
* how long you have been using credit.
* whether you have made payments on time.
* your level of education.
* the number of years you have lived in a single
location.
* the number of years you have worked for the same
employer.
* whether or not you are a homeowner.
What the credit companies are looking for with many of
these factors is your stability and your likelihood to
repay the loan.
For example: if you have been using credit for many
years, make 90% of your payments on time, have a
college education, have lived in the same location for
5 years, and have worked with the same organization
for 4 years; you are more likely to obtain a higher
score. (The higher, the better.)
On the other hand, if you have consistently made late
payments, have a high school education, move
frequently, and change jobs every year; your score
will undoubtedly be much lower. Lower scores
jeopardize your chances for getting credit.
Where Does Your Score Come From?
How, exactly, is your score determined? There are a
number of ways; and each lending institution does not
use the same criteria. The following is a typical
method:
Payment History = 35% - Notice this element carries
the most weight. It looks at missing or late payments,
frequency of late payments, collections, credit card
payments, loan payments, etc.
Outstanding Debt = 30% - The amount of outstanding
debt on loans and credit cards will decrease your
credit score. Lenders will look for how many
outstanding balances you have, how long you have had
these balances, if you keep a high or "maxed
out" balance on your credit cards, and how many
open revolving credit cards you have.
Length of credit history = 15% - How long have you
been successfully paying your debts? (The longer, the
better.) A long credit history that shows on-time
payments will be a benefit to you.
Recent inquiries = 10% - Each time you apply for
credit (of any kind), a credit inquiry is made in your
history. Many inquiries (especially if you have many
inquiries without any approvals) will raise a red flag
and decrease your credit score.
Type of credit = 10% - What types of credit do you
use? Credit cards, equity loans, signature loans? Your
score will reflect how many types of loans you have,
and for how much.
How Can You Increase Your Score?
Certain factors can play havoc with your credit score.
As mentioned earlier, with each inquiry you will lower
your credit score; thus, preventing you from obtaining
the loan you need. To help alleviate this, use a
mortgage broker when applying for a loan or mortgage
to reduce the number of inquiries on your credit file.
Maintain your employment and residence status for at
least TWO years. This shows stability and helps to
build trust in the eyes of your lender.
Do not keep credit card balances near, at, or over
your credit limit. If you have high balances now and
are considering applying for a loan, begin to pay them
down immediately.
While certain factors in your history cannot be
erased, you can begin to do everything in your power
to improve your financial snapshot. When you do, a
better credit score will be ready when you apply for
loans in the future.
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