Wednesday, June 30, 2010

Where Credit Scores Come From

Credit scores are extremely important to your financial well-being, but many people do not understand how they work and how to improve them. In short, your credit score is a number between 300 and 850 that is supposed to represent your creditworthiness. It's a simple and efficient way for banks, lenders, and so forth to determine whether or not they should offer you a loan. By following a few simple rules, you can improve your credit.
Your credit score can have a huge impact on the interest rates of your loans and credit cards, but most people do not know where it comes from or how to improve it. It is generated using a complex mathematical formula that calculates a number to represent your financial history. Banks and lenders actually report information about your financial habits to the companies that calculate credit scores to ensure it is accurate.
Despite the complexity of the formulas they use, the basics of your credit score are actually quite simple. In essence, the two most important factors are your ability to pay bills on time and your ability to use credit wisely. In other words, paying your bills on time boosts your score by demonstrating to lenders that you are reliable. Using credit wisely means keeping your balance as low as possible and making regular payments.
Bearing in mind that banks and lenders are businesses, it is easy to see why they are motivated to report information on your habits. When people do not pay their bills on time, lenders lose money. People who keep a high balance on their credit cards are at greater risk for not paying their credit card debt, meaning even greater losses for the company.
Keeping your credit card balance low and making regular payments are much easier when you have little debt and the financial means to pay them off. If your debt far exceeds what you can handle, filing for bankruptcy protection might be the most efficient way to restore your financial well-being and start fresh.

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