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 did not qualify, 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."
To see your free credit report, visit Experian, the preferred credit report provider for AutoTrader.com.
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