Understanding Your Credit Score
When applying for an unsecured personal loan, your credit score is going to be really important. Because these loans aren’t backed by collateral, the lender stands to lose a lot of money if you cannot pay the loan back. That’s why lenders need to understand how reliable you are as a borrower. And what tells them that? Your credit score! Here’s a detailed breakdown of what your credit score is, how it works, and what you need to know as a borrower.
What is a FICO Score?
Now, when we say “credit score”, what we actually mean is “FICO credit score.” This is by far the most widely-used type of credit score today, and it’s the one you’re going to want to pay the most attention to. The FICO score was created by Fair, Isaac and Company in 1989. (The company is now just called FICO.) It is based on a scale between 300 and 850—the higher your score, the better your credit rating.
Here’s how the scores break down:
- 720-850 – Great Credit
- 680-719 – Good Credit
- 630-679 – Fair Credit
- 550-629 – Subprime Credit
- 300-549 – Poor Credit
How is Your FICO Score Determined?
Your credit score is based on the information contained in your credit report. This document tracks your history of credit use over the past seven years. It has records of how much you owe, what kind of credit you’ve used, your history of on-time payment, whether or not you have any outstanding collections notices against you, and whether you have ever filed for bankruptcy or had a tax lien placed on your property.
When FICO is determining your credit score, they weigh different factors by their level of importance:
- Payment history – 35%
- Amounts owed – 30%
- Length of Credit history – 15%
- Credit Mix – 10%
- New Credit Inquiries – 10%
You can find your credit score through your bank, credit card company or an important document called your credit report. Credit reports are compiled by the three major credit bureaus—Experian, TransUnion and Equifax—and the information on the report can vary depending on the bureau. Credit reports can also contain errors on them, so you’ll want to check your credit report to make sure it’s accurate.
Luckily, everyone is entitled to request one free copy of their credit report per year from each credit bureau. To request a free copy of your report, simply visit: AnnualCreditReport.com
Table of Contents:
- How to Protect Yourself from Payday Loans and Predatory Lenders
- Chapter 1: What Are Payday Loans and Who Are the Predatory Lenders?
- Chapter 2: The Predatory Effect of Payday Loans
- Chapter 3: Safer Borrowing
- Works Cited