What is a Credit Score and How Does it Work?

If you want to make a large purchase, you may not have the money in cash available immediately. Therefore, you use a credit card or take out a loan in order to make incremental payments over time. However, your credit history has a big effect on what types of credit cards you are eligible for, but more importantly, whether or not a lending agent feels you are trustworthy enough to be given a loan for a home or a car. Because of this, it is important for credit card users to maintain a good credit rating by paying bills on time and not falling in to debt.

What is a credit score?

A credit score is the method lenders use to determine your ability to pay back what is loaned to you, and thus directly affect your ability to borrow money in the future. The score itself is a three-digit number that takes into account a variety of factors to determine your creditworthiness, including:

Outstanding debt: any debt you are late in repaying

Payment history: including whether or not you pay your bills on time.

Length of credit history: how long ago you first acquired a credit card or a loan.

Current types of credit: including any loans or credit cards.

New credit: have you recently opened a new credit source?

Low scores indicate past or present debt or monetary issues, while high scores indicate responsible spending behavior. Therefore your credit score indicates your reliability to banks and loaning agents.

The credit score is based on the FICO method, with which a person's credit falls between 350 and 850 depending on the ratio of their debt compared to their overall income along with other factors, such as the ability to pay bills in a reliable manner. Over time, the credit score will rise if a person's debt is reduced, and will fall if the amount is increased.

Unfortunately, credit card companies make it easy for even responsible spenders to fall into debt. Once you get behind in your payments, your credit score drops, negatively effecting the results of any future endeavors to acquire loans or other types of credit. In some cases, people find themselves so far in debt that they are faced with difficult situations, such as foreclosure or repossession of their homes or property. In serious cases such as these, it is advisable to seek the help of a debt negotiation attorney to help effectively negotiate with credit card companies in order to help you get out of debt.

Source by Joseph Devine

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