| Most adult Americans are familiar with what represents good and bad credit and the all-too-famous FICO score. Of the three credit reporting agencies (Experian, Equifax and TransUnion), Equifax and TransUnion both use the FICO score algorithm to calculate their scores. And Equifax uses the beacon credit score which takes into account various aspects of your life such as your job, income, changes of address, credit inquiries and debt. As you can see, it doesn't analyze only the debt part of your status, but also rates you in terms of stability.
Lenders request a beacon credit score in order to determine how likely you will be to pay back a loan that they offer you. The score that you receive determines the size of your loan and the amount of interest you will pay on the loan. Credit scores range from 300 (the worst) and up to 850 (the best) but the average American will fall somewhere between 600 and 800.
In order to be approved for a bank loan and to get the best interest rate available, your credit score must be above 750. Having a score above this amount can save you quite a bit of money in interest payments. Banks with lower interest rates request that you have a credit score of at least 640 if you want a loan while banks with mid- to high- interest rates will settle for scores above 540. Most banks do not use only the beacon model used by Equifax but they look at all three credit bureau ratings.
How timely you are with bill payments counts for a whopping 35% of your credit score. Any late or missed payments will count against you. How much credit you are using relative to how much credit you have available is another factor that is taken into consideration (this represents 30% of your score). If you are using all of the credit available to you, your score will be lower.
How long you have established credit is another 15% of your score. The longer you can maintain paying your bills on time, the better your credit will be. The type of credit that you have also counts into your score (10%) so try to stick with reputable sources of credit and don't open too many small finance credit cards. Also, do not open too many credit cards at once. This is a red flag to credit reporting agencies or lending institutions.
You can access your beacon credit score very easily and quickly online. Many sites also offer you calculators that can determine your score and help you to raise it before you decide to try to take out a loan. If your score is below what you were hoping, waiting an extra few months while paying your bills on time could mean getting a better loan with a lower interest rate. A key to good credit is to take out loans only when absolutely necessary and to pay them back on time. |