Understanding Your Credit

Your credit rating plays an important role in your life. It is both your right and your responsibility to understand how the credit system works, how it affects you, and what you need to do to make sure that the information gathered and reported about you by the credit reporting companies is as accurate as possible.

Credit Scoring

Your credit score is the first thing most lenders look at when determining whether or not to grant you credit. It is also the one aspect of credit reporting that most people understand the least about. Your credit score is a numerical assignment (ranging from as low as 500 or so to as high as 900 or so) that tells the lender what kind of a credit risk you are. The score is based upon a number of factors, some of which you have control over and some of which you may not. Your income level, payment histories, and income to debt ratio all affect your credit score and are all things that you can control to some degree. Things that also factor in but which you may have less direct control over (or may never have realized can affect your score) are things like where you live, what kind of car you drive, what you do for a living, whether you’re married or single, whether you have children, and so on. This portion of credit scoring works similar to how insurance companies assess risk. Married people with children tend to be more stable than single people with no attachments, for example, and can therefore score slightly higher. Much more important than these esoteric factors, however, is your actual credit history.

Credit History

More people understand credit history. This is simply a record of how you pay your credit obligations and how many obligations you have. The Fair Credit Reporting Act dictates how long certain items may stay on your credit history. This is good because mistakes that you might have made when you were young should not be able to follow you all your life. It also gives everyone a “second chance”. It is possible to “clean up” your credit history, but it takes time. There is no “quick fix.” Companies that offer one should be avoided at all costs. They simply want to charge you to do something that you can do yourself. Many of them are nothing short of a scam.

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