Your credit score is the most important 3 digit number in your financial future. Your credit score will determine your loan limits, interest rates and eligibility on everything from discount auto insurance to zero-percent credit cards to your leverage with small business loans.
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How Credit Scores Determine Your Financial Worthiness

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Your credit score is the most important 3 digit number in your financial future. Your credit score will determine your loan limits, interest rates and eligibility on everything from discount auto insurance to zero-percent credit cards to your leverage with small business loans.

Although different lenders have individual guidelines for issuing loans, all rely on your credit score to some degree.

Its up to you to calculate your credit score like the credit bureaus do, and always know where you stand on their credit eligibility charts. If you are a military service member with a low credit score, don't panic - there is a lot you can do to help yourself move up in the credit ranks. Check your credit once every 6 months to uncover creditor errors and contact creditors to have them removed. Then follow some simple steps to raise your credit score. Do all of this before you apply for that loan, mortgage or insurance.

FICO CREDIT SCORING SYSTEM

The FICO scoring model is a general credit scoring system, although some lenders may use their own personalized models. The FICO model determines your credit score based on a points system, measuring past credit history and debt-to-income ratio for a mathematical estimation of your credit worthiness. A typical FICO credit score composition is comprised 35% of past payment history, 30% outstanding debt, 15% length of credit history, 10% recent credit applications, and 10% existing credit and loans. A FICO credit score ranges from 300 to 850; 720 or higher is considered a good score, while below 550 is a poor score.

DEBT TO INCOME RATIO

Debt to income ratio is an important factor in determining your credit score. The formula for finding your debt to income ratio is simple: divide your monthly fixed expenses by your gross monthly income before taxes and deductions. Monthly fixed expenses include all debt such as house payments, credit card balances, car payments, child support, alimony - and do not include payments that are paid up constantly like groceries or utility bills.

If your final calculation is higher than 36%, financial experts consider this ratio to be above the accepted debt to income ratio for creditors. The goal for achieving a high credit score is to reduce your debt to income ratio to 20% or lower.

THE ABCD and Es OF CREDIT RATINGS

The FICO credit rating system has 5 general classifications for credit scores, with letter grades that determine your eligibility for low interest rates loans:

"A Rating" translates to a credit score of 720 or higher, debt to income ratio below 35%, good credit between two and five years, zero bankruptcy within two to ten years, and a less than 30 day payment schedule for mortgages, installment loans, and revolving credit.

"B Rating" is a minimum credit score of 620; you will get loan approvals but not at the lowest interest rates.

"C Rating" requires a minimum credit score of 620, and the lender may ask for a co-signor.

"D Rating" is a 550 minimum credit score, with trouble getting approved and a definite co-signor needed.

"E Rating" is the bottom of the charts, with a credit score under 550 and unlikely approval from lenders.

Knowing your credit rating and how to improve it can save you and your military family thousands of dollars in interest and fees and allow you access to the best financial leverage, placing a wide variety of military loans into your future.



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