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Your Loan Depends on your Score
For years, creditors have used credit-scoring
systems to determine if you would
be a good risk for credit cards and
auto loans. More recently, credit
scoring has been used to help creditors
evaluate your ability to repay home
mortgage loans.
There’s no rule for how important
the scores are to getting a particular
kind of loan because lenders have
different guidelines for approval.
In general, you are likely to be considered
a better credit risk if your credit
score is high.
For example, if you are applying for
a home loan, a higher score indicates
that you are a low credit risk. You
will usually get credit quickly and
have a good chance of getting favorable
terms with such a score. If you have
an average score, lenders may look
more closely before giving you a large
loan. Low scores don't prevent you
from getting a loan, but you may not
get the best interest rate or appealing
offer.
The five top most common areas that
are considered in your score are:
- Payment history. Have your payments
on credit cards, car loans and
mortgages been on time? Do you
have any judgments or collection
items? Have you declared bankruptcy?
- Outstanding debt. How much do
you owe on you different accounts,
such as credit cards or installment
loans (a car loan, for example)?
- Credit history. How long have you
been building a credit history and
how long since you used each account?
- Pursuit of new credit. How many
times and how recently have you
applied for a new credit card
or auto loan?
- Types of credit in use. How
many bank cards, entertainment
cards,department store cards,
installment loans, and mortgages
do you have?
The credit bureau then electronically
compares that information to the credit
performance of consumers with similar
profiles. The scoring system awards
points for each factor that helps
predict who is most likely to repay
a debt. A total number of points -
a credit score - helps predict how
likely it is that you will repay a
loan and make the payments when due.
Lenders may also consider information
not on your credit report when deciding
whether to give you credit or a loan,
such as how long you have lived in
the same place, how long you have
been at the same job, and your education
level.
If your score results in you being
turned down for credit, the lender
can show you a list of reasons your
score was not higher, which is included
with the score. These are specific
and include explanations such as "amount
owed on accounts is too high"
or "too many accounts opened
in the last 12 months." |
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