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Do you remember your schooldays when the evaluation of your work was received as a letter grade? Now that you are a grownup, there is another very important grade that should concern you. It is aptly named your credit score, and it can have a profound affect on your financial life.

A prospective lender wants to make sure that you are a trustworthy risk and any debt accrued by loans that you apply for will be paid off with interest. Having a low credit score indicates that you do not have a good a track record of paying your debts in a timely manner and thus are considered a higher risk for future loans.

The credit score scale ranges from 400 to 800, where 700 is considered a very good score, one that you should aim to achieve. There really is no such thing as a failing grade when we talk about credit scores. However, the fact is that you will end up paying a much higher interest rate on loans if you have a low credit score. In some instances, you can be denied a loan altogether if your score is too low.

Your credit score is determined by several factors. The first component is your payment history. If you’ve had problems making your payments on time in the past or have declared bankruptcy within the last 10 years, these items will be reflected on your credit report and your score will be lower as a result.

Another factor making up part of your credit score is the dollar amount of debt that you currently owe. Lenders not only care about the total amount owed, but the amount owed in relation to your credit limits. For example, on a credit card with a $2000 limit, credit-reporting agencies prefer that you use only a small percentage of this total limit, say $200. This would be considered a low debt to credit ratio.

In addition to your payment history and debt to credit ratio, the length of your credit history is also a factor in your credit score. Additionally, the number of inquiries or “hard pulls” to your account can lower your score. Lenders get suspicious when too many people make checks on your credit score. They assume, often wrongly, that you are accumulating a large amount of debt.

If you have a low credit score it doesn’t mean the end of your life is near, though there are those who would make it seem so. If you have a low credit score, you should understand that your financial situation is definitely reversible. Once you get a handle on your debt, your credit rating scores will improve with time.

You can’t improve your credit score overnight, however. But, with proper dedication, time and the right knowledge, your goal can ultimately be achieved.

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2. Maintain A Squeaky Clean Credit Report
3. FICO Score Simulator
4. Determining Your Credit Worthiness From A Free Credit Report
5. How Do Late Payments Affect My Credit Report And Score?