Credit Score

What Is A Good Credit Score?

Credit ScoreCredit worthiness determines how much interest you will be asked to pay on a loan, how much you will have to pay for insurance, and whether you will be considered eligible for the best deals offered by most service providers. Your credit score is therefore an important number, and there are specific means to raising that score.

It should be pointed out that while there is no one definitive way to scale a credit score in terms of determining eligibility for good interest rates, one thing is clear. The amount you pay in loan interest can mean the difference between saving money and finding yourself drowning in debt. Understanding how your credit score is calculated and figuring out what you can do to improve it is the first step in understanding how to manage your finances.

What The Credit Score Reflects
There are different means of calculating credit worthiness, but the one most familiar to consumers is the FICO score. This is the rating system used to determine whether you are qualified for a credit card account, auto loan, or favorable insurance prices. The FICO score ranges from 300, which is the lowest rating, to 850, which is the highest possible rating.

Factors that influence your FICO score include payment history, amounts owed on loans and revolving credit lines, length of credit history, how often you apply for credit, and what assortment of credit lines you currently have. These are all calculated independently, and the results are mixed to form the final rating score.

In general, anything below a score of 550 is considered poor credit. The average grade is given for scores between about 550-700, and anything above 700 is considered as good credit. In the United States, the average score for consumers is around 720.

Other Credit Rating Systems
Banks that loan money for home purchases often use a different, more secretly calculated formula for determining credit worthiness. Insurance companies and service providers – such as cable and internet providers – often use their own means for determining credit eligibility.

Insurance providers may take your FICO score (check out our free Credit Score recommendations) into consideration before deciding how much to charge you for auto insurance. This is because statistics show a correlation between credit history and overall financial responsibility. After all, an insurance company wants to retain you as a customer for a long period of time, and they want you to pay them a lot of money, much more than you will ever ask for on an insurance claim.

Insurance companies and service providers therefore look at your credit score as well as your income and your current dwelling situation before they make a decision on rates and contract lengths. It is important to understand that your credit score is used by more than just VISA and MasterCard issuers.

Improving Your Score
If you already have several lines of revolving credit as well as a car loan, you probably don’t want to apply for any additional credit at this time. Every time you apply, the credit bureaus notice and may slightly decrease your score. Therefore, concentrate on paying down the balances you currently have, and make sure you always pay more than the minimum amount. Unless the balances decrease significantly over the next 12 months, your credit score is unlikely to improve.

Consider transferring your credit card balances to a single card with the lowest interest rate. Often, credit card companies will raise your credit line if you specifically ask for these transfers. You can then eliminate the other accounts and pay a single monthly bill to one company.

If you are in default with a credit card company, contact their second-party collector and negotiate a settlement amount. If you receive notices in the mail about paying only about two-thirds of the balance in order to settle, don’t believe it. You can probably settle for even less if you talk to them. This will not affect your credit score for up to five years after you settle, but it is a better option than continuing to have a defaulted account.

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Move Your Money Admin

Melissa is the Move Your Money Admin and Chief Muckity Muck.