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Credit Report & Credit Score; Credit Repair, Debt Management > Credit Score > What You Can Learn from the Credit Scoring System

What You Can Learn from the Credit Scoring System

By Ruth Racey
Published: Tuesday, November 3rd, 2009

You were excited about buying the home of your dreams and you were almost certain that you can get that house loan without any problem.  You have found the right lender and prepared all necessary documents to submit with the loan application.  You have excellent references to back you up, too.  Now all you needed to do was to wait for the approval of your loan and buy the house you have been dreaming of.

After a week, a representative of the lending company calls you up and says that your loan application has been declined.  What could have gone wrong?  Thoughts were racing as the lender tells you that your credit score did not pass their credit standards.  By this time, you realize that you forgot to do one important step before submitting the loan application and that is check your credit score.

Yes, lending companies will check on your personal credit report upon reviewing a loan application.  Mortgage lenders tend to be stricter when it comes to credit standards since a much higher value is involved in a house loan.  If you have any plans of applying for a mortgage or any type of loan, check your score first to ensure approval.

What can you do if you found out that your score is not at par with the lending company’s requirement?  It would be best to wait a while before submitting another loan application and in the meantime, get to work in improving your credit score.  How can you improve your score?

It is important to understand that the credit scoring system is based on 5 categories.  These include payment history, amount of debts versus credit limit, age of credit history, types of debts, and inquiries on the report.  Among these categories, payment history makes up the largest percentage of your total credit score at 35% and your credit-to-debt ratio at 20%.

Therefore, you can greatly improve your credit score by making sure that you do not have any outstanding balance in any of your accounts.  If you do, work on repayment.  The sooner you can get rid of those outstanding balances, the better your credit score will become.  Stay updated with current bills and make sure that you will never miss even one payment due date.  By doing so, you can increase your credit score by a few points or more in as little as 6 months to a year.  Of course, the progress you can make on your credit score will depend on your present rating.

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