If you are looking to purchase a home, a car, or anything requiring the borrowing of money, you may want to know what the term “bad credit” means. Having the term bad attached to your credit score will have a huge impact on the way you get to experience the American dream. The type of score you have will make a substantial difference in the limits you will have when shopping for those large ticket items.
The banks and financial lenders will decide whether or not you receive the loan your requesting based on the results of a credit check done on you. It is this score that will help them to decide how much funding they feel you can be trusted with, the percentage attached to the loan and finally the type of fees that may be attached to the loan agreement. So, what factors go into determining who gets the “bad credit” tag?
Good or Bad Credit is Dictated by the Credit Score
There are three major credit bureaus that provide lenders with credit scores. These reporting agents, Trans Union, Experian and Equifax use a formula developed by FICO (Fair Isaacs and Company) to calculate a what a persons credit score will be. How you managed your past loans get reported to these agencies. Some of the factors that are looked at are; bill paying history, type of accounts, number of accounts, the accounts age and any current outstanding debt.
Most lenders report to all three, but they are not required to do so. One lender may report to two of the three or only one. Each agency may have different information and they might calculate your score in different way, but they will each provide a FICO score between 300-850. The lender will have the opportunity to review the applicants’ characteristics that were used to determine the actual score. Each lender decides if they want to use one credit bureau score or the FICO score from all three.
Low Risk and High Risk Credit Scores
Even if you have not committed some of the things other people with your credit score have, you still get categorized. It takes a credit score of roughly 760 or higher for lenders to consider you a low risk candidate. Low risk borrowers have shown a track record of defaulting on loans less than twenty percent of the time and tend to get rewarded with a lower interest rate. Quite the opposite, as most of you have expected, with high risk borrowers. These candidates generally have a score of 539 or less and fit into a category of borrowers who have stopped making payments on loans roughly twenty percent of the time. They will get penalized with a higher interest rage. In the long run, a higher percentage rate will cost the individual much more in the long run. This just shows if you want to pay less, make the time and effort to take care of your credit score and rating. It’s all about choices. Are you going to make decisions that will help build and maintain credit or choices that destroy.
Positive Steps for Good Credit
1. Make sure bills are paid on time.
2. Start building credit early. The longer your credit history, the better.
3. Use the least amount of your total available credit as possible.
Ways to Quickly Destroy Credit
1. Make late payments
2. Miss payments
3. Max your credit limit
4. Bankruptcy
5. Repossessions
6. Short credit history
7. Default on Loans
Debt ratio is the final factor you should take into consideration when it comes to good credit. No more than forty percent of your income should be needed to pay on unsecured debts. An example of this type of debt is credit cards. The other sixty percent should be for living expenses. Basically a 60:40 ratio is required to still be considered in the good credit category. Sixty for living expenses and 40 or less on unsecured debt.
Article Source: http://www.articlesbase.com/credit-articles/do-you-understand-what-having-bad-credit-is-4699890.html
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