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Why Your Credit Score Matters

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When you apply for credit, insurance, phone service, or even to rent a place to live, providers want to know if you’re a good risk. They use credit scores to help them decide.

A credit score is a number. A high credit score means you have good credit. A low credit score means you have bad credit. A higher score means you’re less of a risk, and are more likely get the product or service — or pay less for it.

Here’s how it works: Lenders pull information from your credit report, like your bill-paying history, how long you’ve had your accounts, outstanding debt, and collection actions. A scoring system awards points for each factor that helps predict who is most likely to repay a debt. The total number of points — a credit score — helps predict the likelihood that you’ll repay a loan and make payments on time.

Credit scores can be used in a variety of ways. Here are some examples.

Insurance companies may use information from your credit report, along with other factors, to help predict your likelihood of filing an insurance claim and the amount you might claim. They consider this information when deciding whether to give you insurance and how much to charge.

Utility companies use credit scores to decide if a new customer has to make a deposit for service. Cellphone providers and landlords also use scores when considering a new customer or tenant.

Different companies have different scoring systems, and the scores may be based on more than the information in your credit report. When you apply for a mortgage, for example, the system may consider the amount of your down payment, your total debt, and your income.

To improve your credit score, focus on paying your bills on time, paying down outstanding balances, and staying away from new debt.

Learn more at Credit and Loans.

This article by the FTC was distributed by the Personal Finance Syndication Network.




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