ABOUT CREDIT SCORES
A credit score is a three-digit number that expresses the raw data of your credit report. Just as a student’s GPA shows how well a student is doing at an educational institution, a credit score shows how likely you are to repay a debt. This is called solvency. Your credit score can affect your ability to get loans, including auto loans and home loans.
The three major credit reporting agencies in the United States are Experian, Equifax, and TransUnion, and, along with FICO (Fair Issac Corporation), each calculates consumer credit scores. Since their calculation models are somewhat different, a consumer’s Score may vary depending on the agency that makes the calculation. You can purchase your credit score from these companies for a fee. You may also be able to obtain your credit score from your financial institution or credit card company.
When you apply for credit, most lenders request your credit report and obtain a credit-reporting agency score. The scoring systems were created to help lenders speed up the loan review process and correctly determine the risk of giving you a loan. Scoring systems have been used since the 1950s by retail businesses, credit card companies, insurers, and banks for consumer loans. In recent years, credit scores have also been used by mortgage lenders.
Lenders use the scoring results from credit reporting agencies to determine specific reasons for approving or not approving a loan. The scoring process only considers information from your credit file; it does not consider your income, savings, or the amount of a down payment on a home loan. The credit reporting agency score appears when your credit report is printed at your lender’s office. Your Score can range from over 300 to 850. Research by lenders has shown that borrowers with scores over 680 are more likely to make their payments on time. Borrowers with scores below 600 are the potential to be at higher risk.
But lenders aren’t the only ones who might take credit scores into accounts. Insurance companies may charge higher premiums for people with lower credit scores. Even for services that cannot be denied based on credit (such as water or electricity), providers may require substantial collateral payments before providing service to you if you have a low credit score.
Points are assigned or deducted based on factors such as how long you’ve had credit cards, whether you make your payments on time, and whether your credit balances are close to maximum. Some of the factors that affect your credit score include:
- Payment defaults (failure to make loan payments on time)
- Too many open accounts in the last 12 months
- Limited credit history
- Revolving credit balances close to the maximum limits
- Information about you in public records, such as tax liens, judgments, or bankruptcies
- No recent credit card balances
- Too many recent credit inquiries
- Very few revolving accounts
- Too many revolving accounts
To have a higher credit score:
- Pay your bills on time
- Keep credit balances low
- Apply for and open new accounts only when necessary
Since the length of your credit history is a factor in your Score if you’re going to close credit card accounts, keep the card you’ve had the longest. If you have a credit card that you don’t use, check your account occasionally to ensure there’s no fraudulent activity.
Another way to help improve your credit score is to combine revolving credit (for example, credit cards) and installment credit (for example, a car loan).
THE IMPACT OF YOUR CREDIT SCORE
Your credit score is essential. Having good credit may make it easier to borrow money, lower interest rates on loans or credit cards, lower insurance premiums, and make renting an apartment and buying a home easier.
Your credit score can affect:
- Your ability to obtain a credit card
- Your ability to buy a home
- If a landlord will rent you an apartment
- The interest rate lenders are likely to offer you
- The number of your insurance premiums
- Your ability to borrow money
Lenders are likely to take your credit score to indicate how reliable you are in paying your debts. In general, credit scores range from 300 to 850, especially those based on the standard FICO® Score. Sometimes you’ll see industry-specific credit scores that range from 250 to 900. Whether you’re looking at a standard FICO® Score or an industry-specific score, the same rule applies: the higher, the better. . Generally, the higher the score, the lower the risk for the lender, which could lead to lower interest rates for you.
Credit scores are calculated based on the data in your credit report, so it’s essential to make sure there are no errors in your credit report. Five factors determine your Score:
- 35% of your Score is based on your payment history
- 30% is based on current debts
- 15% is determined based on your credit history
- 10% is allocated to new credit applications
- 10% corresponds to the existing types of credit
HOW TO IMPROVE YOUR CREDIT SCORE
Improving your credit score can take time. You must have the best credit score possible. It could make borrowing money less expensive and may even affect your ability to find a place to live. The best way to improve your credit is to manage it responsibly over time, pay your bills on time, and apply for credit only when needed. Today, you can get started by developing good habits and establishing a consistent credit history.
The higher your scores, the more likely you will qualify for more favorable terms and conditions, saving you money. improving credit scores takes time, but the sooner you address the issues that could be hurting them, the faster your credit scores will rise. You can increase your scores by taking the following steps.
1. Pay your bills on time. Your credit score shows how well you pay your bills. Payment history is the factor that has the most significant impact on your good credit score.
2. Pay off debt and keep credit card and other revolving credit balances low. The amount you owe relative to your available credit limit helps lenders know how well you manage credit. Too much debt is a warning sign for lenders.
3. Apply for and open new credit accounts only when necessary. Having credit you don’t need can hurt your credit score and tempt you to overspend. Applying for credit creates a voluntary inquiry on your credit report and can negatively affect your credit score. Be sure to apply for credit only if you need it.
4. Dispute any incorrect information on your credit reports. Check your credit reports from each of the three credit reporting agencies every year. Check them for any errors: dispute errors and incorrect information with each credit reporting agency.
5. Consider getting a secured credit card. If you’re trying to establish a positive credit history, you may want to consider a secured credit card. These cards require a security deposit equal to the line of credit. Unlike prepaid cards, major credit reporting agencies will report payments and activity.
