Q: What is a credit score?
A: Credit scoring is a system creditors use to help determine whether to give you credit, and how much to charge you for it.
Q: What is generally on your credit score?:
* Payment History
* Amounts Owed
* Number of Accounts Owned
* Length of Credit History
* New Credit
* Types of Credit Used
Q. What is done with credit score information?
A: Using a statistical formula, creditors compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor. A total number of points — a credit score — helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the payments on time.
Q. How do credit scores affect my ability to get credit?
A: Generally, consumers with good credit risks have higher credit scores. You can get your credit score from the three nationwide consumer reporting companies, but you will have to pay a fee for it. Many other companies also offer credit scores for sale alone or as part of a package of products. For more information, see Credit Scoring at ftc.gov/credit.
Q. Is there really that much of a difference if you have a good credit score instead of a bad credit score?
A: Below is an example…
You want to buy a used car for $12,000
You put payment of $2,000 down
So you want to take out a loan of $10,000
The loan you are looking at is a 48-month loan
Below is the difference between having an excellent credit score and a not so good credit score:
Score: 720-850 500-589
APR: 4.97% 15.83%
Monthly Payment: $230 $283
Total Interest Paid: $1,047 $3,562
Savings: $2,515
5 Tips for Building Wealth and Managing Debt
1. Pay yourself first by making saving a priority over optional spending.
2. Track all your expenses for a full month, and be sure to separate your needs from your wants. Your budget should factor in savings. Stick to that budget!
3. Set specific but achievable long-term savings goals for major purchases like a car, education, home, and retirement and healthcare expenses.
4. Benefit from the power of compound interest by saving as much as you can as early as you can. Don’t miss out on employer-based retirement programs that often include an employer match. Not taking advantage of this is like leaving money on the table.
5. Benefit from tax advantages that allow you to build savings tax-free for specific purposes like retirement, education and healthcare.
5 Tips on Managing Credit
1. Build savings to avoid higher-cost debt, improve payment options and provide a cushion for emergencies.
2. Pay bills on time to help maintain a good credit score, since your credit score can impact your ability to obtain credit, employment, insurance and housing.
3. Whenever possible, pay more than the minimum payment to avoid finance charges.
4. Comparison shop for new credit, but obtain only the credit you need; and negotiate with existing creditors for best terms.
5. Obtain your free credit report at least once a year to help manage lines of credit effectively and to monitor for instances of identity theft. (www.annualcreditreport.com)
Tips to Improve your Credit Score
- Have you paid your bills on time? You can count on payment history to be a significant factor. If your credit report indicates that you have paid bills late, had an account referred to collections, or declared bankruptcy, it is likely to affect your score negatively.
- Are you maxed out? Many scoring systems evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, it’s likely to have a negative effect on your score.
- How long have you had credit? Generally, scoring systems consider the length of your credit track record. An insufficient credit history may affect your score negatively, but factors like timely payments and low balances can offset that.
- Have you applied for new credit lately? Many scoring systems consider whether you have applied for credit recently by looking at "inquiries" on your credit report. If you have applied for too many new accounts recently, it could have a negative effect on your score. Every inquiry isn’t counted: for example, inquiries by creditors who are monitoring your account or looking at credit reports to make “prescreened” credit offers are not considered liabilities.
- How many credit accounts do you have and what kinds of accounts are they? Although it is generally considered a plus to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many scoring systems consider the type of credit accounts you have. For example, under some scoring models, loans from finance companies may have a negative effect on your credit score.
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