Understanding Credit and Your Credit Score for Loans

Credit can be defined as a method of buying and selling without immediate payment and is generally granted by means of credit cards or loans. So it is crucial to understand your credit score for loans.

Credit reports and credit scores are used to determine how creditworthy you are. If you have poor credit rating, you need to know how to repair credit if you wish to borrow money.

When you buy something with a credit card, you have a fixed period in which to repay the loan, after which interest is charged. There is a minimum amount which needs to be repaid each month and the longer it takes you to pay off your loan, the more you will have to pay in interest.

Loans come in many shapes and sizes, including student loans and mortgages and will each have specific terms and conditions. The repayment period will vary according to the loan type for example, federal student loans must usually be repaid in ten years, but consolidated student loans can be extended for up to thiry years.

If you are applying for credit, the lender will check your credit score rating, in order to decide your eligibility.

Both your existing credit status and your past credit hsitory will be used to determine your credit score.

Every country sets its own standards, for example in the United States the average average credit score ranges between 580 and 650. The higher your credit score the better when it comes to being granted a loan.

Learning how to manage your finances is an important skill and one that you will need even more in the present economic climate. You will need to make sure you live within your means that is your regular outgoings - rent, bills, travel, food and transport - don't exceed your income - your salary and any other income you have, such as interest on savings, rent from a tenant etc.

What is Credit Score?

Your credit score is a figure used to determine how credit worthy you are, that is, how likely you are to be able to pay back a loan.

It is calculated by taking the information in your credit report and analysing this to arrive at a number which indicates how good or bad your ability to deal with credit might be. There are 3 main companies which deal with credit and they don't all use the same calculations. The factors which contribute to your credit score are:

Payment History

This accounts for around 30-35% of your overall credit score. And is based on the following:

Whether or not you pay bills on time. Any late payments will also be considered, including factors such as how often you make late payments, how late they are any negative steps that have been taken against you as a result of overdue payments. Bankruptcy is another consideration.

Amount you owe

The total amount of debt you have acquired will count for around 30% of your credit score. The number of debts and accounts to which you owe money will be counted towards this percentage.

Length of your credit history

The length of your credit history counts for approximately 15% of your credit score. So the longer you have kept your credit cards, the higer your score will be. It can be a good idea to keep old credit card accounts open, as this will help to improve credit score.

New Credit

This counts for 10% of your score and takes into account The new credit factor looks at how many new accounts have been recently opened, how often have you made requests for credit and the length of time since the credit inquiries were made. If you are shopping for better rates, it does not affect your score because inquiries are made for particular kind of credit during a short period of time.

Mixture of Credit

Your overall mixture of credit accounts for about 10% of your credit score. This might include credit cards, your mortgage and any personal loans you may have taken out. If you have a well balancedcombination of credit, the aspect of your finances will contribute to a better overall credit score.

Cleaning credit is often necessary if you want to reduce interest rates or secure a loan or mortgage. Learn how to raise credit score and create a new credit history, by rebuilding your credit.

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