How important is a good credit score?

Joshua, a hard working, tax paying Canadian resident recently found himself in a pickle. He applied for a car loan and the least expected thing happened. He was rejected. Highly baffled and astonished, he wondered where he went wrong. If this has happened to you and you are still amazed how your application got rejected, then it is time go in flashback and review your credit history. Even a one-time delay in paying your monthly installments can be detrimental to your credit score, and in turn your future creditworthiness.

What is credit score?

Your credit score or FICO score, as it technically known, is a statistical analysis of your payment history derived using your credit files. Ranging from 300 to 900 (the higher, the better), credit reporting agencies derive this magical number by collecting and using information on your credit report.

Potential lenders, banks, insurance companies and even future employers may want to know your credit score before making their decision. With the help of your FICO score, these entities calculate the risk of lending you money in the near future.

In some cases, the bank or lender may approve your loan application despite your low credit score. Now wait; this is not as great as it sounds. If an entity has sanctioned a loan to an individual with a poor credit score, chances are that the interest rate charged will be quite high. Yes! Even the rate of interest charged and the credit limit allowed (in case of credit cards), may be decided after reviewing your credit score.

So what are the factors that influence you credit score?

  • Status of your payment history - whether or not you have made your monthly payments on time. If you have missed out on any payments. Also, remember maxing out most of your credit cards will also have a negative impact on your credit score.
  • Remember that bankruptcy remark stays on your credit report for almost ten years and it can really scare away lenders from giving you money.
  • Your total outstanding debts are also considered before determining your credit score. What is the status of your credit cards? How many credit cards do you have? Do you have enough monthly funds to payback your debts?
  • What are the different accounts that you are using? Are you using only credit cards or do you have mortgage and other loans as well? These are all deciding factors when it comes to determining your FICO score.
  • What new credit have you applied for? A car or home loan?

Remember that out of the above listed criteria, the most important and dominating factor that influences your credit score is your payment history. With the growing recession banks and other lenders are becoming particularly stringent about choosing the borrowers.

What action you can take to improve your credit score?

  • If you want to be a desirable candidate for a loan then make sure that you don’t miss out on your monthly payments. Plan your expenses in a way that you can pay the bills as soon as they come. It is not a great idea to put off the payments till the end of the month as that increases the chances of default.
  • While improving your credit score, it is best to stay away from filing for bankruptcy as it stays on the credit report for ten long years. Also, by all means steer clear from tax liens as it leaves a permanent negative remark on your credit report and in turn hampers your credit score.

With the help of professional guidance and sincerity you can drastically improve your credit score. But keep in mind that it is a slow and steady process and opting out somewhere in between will only make the cleaning up process longer and tedious.

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