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When you apply for a loan a lender will evaluate your credit report to determine if you are a good risk as
regards making your monthly payments. A credit report showing a history of making payments on time
indicates a better risk than a report showing late or missed payments. It is usual to obtain reports from
the three major credit reporting agencies: Experian, TransUnion, and Equifax.
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To facilitate the evaluation of an applicants credit the Fair Issac Corporation created a method of
scoring called the FICO score. The score is based on the information each credit agency keeps on file
about you. The three major credit reporting agencies each create their own credit scores, these are somewhat
similar, but not identical, numbers. It is common for lenders to use the middle score as the basis of their credit
evaluation. Credit scores are based primarily on the following:
- Credit - Length of time you have had credit?
- History - Do you have a history of paying your bills on time?
- Inquiries - Have you had your credit checked many times recently?
- Account Balances - How many accounts do you have and how much is owing?
FICO scores typically range from 340 to 850. The higher your FICO the more likely you are to be
approved for a loan and the better the terms (interest rate etc.) you will be able to qualify for. Lenders take
many factors into account as well as FICO scores to make their credit decisions.
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FICO scores change over time to reflect changes in the credit data on file with the reporting agencies.
With a knowledge about how scores are calculated it is possible to improve your credit. It takes time
to accumulate a better credit record so you should not expect an overnight improvement.
Here are some guidelines you can use to bring about an improved FICO score:
- Get all accounts current and make all future payments on time.
- Don't open a lot of accounts in a short period of time.
- Credit report requests from multiple mortgage companies in a short period of time will not hurt you.
- Do obtain a copy of your credit report, it will not hurt your FICO score.
- Do have a credit card but be sure to use it responsibly.
- Pay off accounts rather than moving them around.
- If you have a lot of debt start paying it off.
- Do make use of different types of credit.
- Clear up any errors on your credit report with the reporting agency or the creditor.
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