Money Matters
What you need to know about credit and borrowing
Almost all Americans hold some amount of debt. Many of us borrow in order to buy a home, purchase a car, start a business, or go to college. However, even in these cases borrowers need to consider the options and consequences very carefully. Abusing credit is a sure path to financial distress.
There also can be emergency situations where borrowing money is necessary or the least expensive solution to a problem. Borrowing money to get the wide-screen TV for this week’s football game is almost certainly not an emergency or a good idea.
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What is a FICO score?
Developed by the Fair-Isaac Company, your FICO score is determined by a variety of factors. For instance:
35% of your FICO score comes from your payment history. Late payments are bad, having bills turned over to collection agencies is worse, and bankruptcies are the worst of all. A history of timely bill payments raises your score.
30% of your score depends on how much you owe and how much of your current credit you have used. If you have maxed out your credit cards, your score will be lower.
15% of the score is based on the length of your credit history. The longer you have been using credit cards or paying off loans the better.
FICO scores range from 300 to 850. Scores above 750 are excellent and those below 660 are regarded as signs of a risky borrower.
Federal law requires that each of the nationwide consumer reporting companies—Equifax, Experian, and TransUnion—provide you with a free copy of your credit report (though not your score) at your request every 12 months. Even if you have received a free report in the last 12 months, you can get another if you have been turned down for credit, insurance, or employment and you request the report within 60 days of denial. Though annualcreditreport.com is the only authorized website for submitting a request for a free credit report, you may also call 1-877-322-8228 to request a free credit report.
Why does your FICO score matter?
Though originally developed to determine how likely a borrower would be to repay a loan, FICO scores are now used to gauge other sorts of risk. Insurance companies use FICO scores to set rates for homeowners’ insurance. Employers sometimes will not hire applicants with low FICO scores. Landlords may not rent to people with low FICO scores.
But the original use is reason enough to guard your FICO score. Riskier borrowers are usually charged higher interest rates and if they are deemed too risky, they may not get a loan at all. For instance a 10 percent drop in your FICO score can increase total mortgage payments by thousands of dollars.
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