If lately, you have felt the need for that one website that will offer you complete information about the ‘credit score’ and everything that revolves around it then you have made your pit stop at the right place. Well, since we all use credit cards, the fact cannot be denied that the credit score has great relevancy in our lives. So, without any further ado, let straightway discuss the credit score in detail.
If you have just started using a credit card, then it is imperative to know that a credit score comprises of a three-digit number. It gets calculated using details from your credit report by any of the three leading credit agencies at any point in time. Whole information, present in your credit card, gets summarized in one single number. Further, it becomes very easy for the lenders can use this number to evaluate your credit risk at a glance.
These lenders also have the provision of evaluating the credit risk – how soon you will be paying your obligated credit as agreed – using FICO® Scores. Usually, the credit score falls within the range from 300 to 850 and the higher the better.
How Credit Score is calculated?
This is where you get to know about how the credit score is actually calculated. So, let me breakdown the credit score into 5 components –
- Payment History.
- Amounts Owed.
- The length of the credit history.
- New Credit.
- Types of credit used.
The most important factor in determining your score, payment history, is simply a record of whether you’ve paid your bills on time.
The second more important, amount owed, is a little more complicated. It looks at how much you’re using of the total credit you have available – also known as your “utilization ratio.” Lenders believe that borrowers who are close to maxing out their credit are more likely to miss payments.
The third factor, length of history, is determined by the average age of your accounts, as well as how long it’s been since those accounts were used.
The two smallest factors are how often you’ve opened new accounts (opening a bunch at once will hurt your score), and whether you’ve got a mix of different types of credit (such as a mortgage, student loan and car loan). Lenders like to know that you can manage different kinds of accounts responsibly.
Also See: Debt Validation Calculator
What should you know about the payment history?
Starting off with Payment History, it is one of the key components that helps in calculating your credit score. In order to see your capability of paying off your loans successfully, lenders are highly interested in having a glance at your past performance. The types of loans in which the lenders would be interested are – consumer finance account, credit card, installment loan, mortgage, etc.
Why lenders show interest in your owed amount?
In addition to knowing about the types of loans, the lenders will be interested in knowing the amount you actually owed. Despite having an impressive credit record, the lenders have on set limit at which they won’t lend you money at any cost. The main reason behind this is your debt to income ratio that won’t allow lending of any more money to you. Following are some of the key elements that are acknowledged for your FICO score –
- The proportion of credit lines used.
- The owed amount on all the accounts.
- Not having a specific type of balance, not in all the cases.
- A number of accounts having balances.
Do you know the importance of having a credit history?
The lenders feel more confident lending to all those people who have a positive past history of handling credit. These are the people, the lenders can trust, who will make timely payments in the future as well.
How new credit really matters?
This points out towards how much credit you have taken out lately. The lenders may become concerned if you have recently applied for a hefty amount of loan and continue to ask for more credit.
What are the types of credit on the report?
There are multiple types of credit on your report. Some of the common types of credit comprise of installment loans, credit cards, consumer finance accounts, mortgages, retail credit accounts, and installments loans.
Things You Don’t Know about credit score
Well, let’s be honest here, not everyone has holistic information about the credit score. I am sure when for the first time you have looked at your credit score, you must have said what is this, I just don’t get it? So, in order to clear the smoke of confusion, allow me to discuss the things that will make you understand what credit score is all about.
- About Credit Bureaus – There are three key credit agencies namely – Equifax, Experian, and TransUnion. They are mainly responsible for evaluating your credit score and generating reports on the basis of that. But, no matter what they won’t judge your credit score or they won’t advise your lenders whether to approve or to deny any application. There is no way your credit will be rated.
You must be wondering if these three credit agencies are not analyzing our credit then who does it? Your credit risk level is evaluated, on the basis of your credit report, by the companies like VantageScore and FICO. Different scoring models are being framed to assist businesses to predict, if you will make the payments as promised, credit score is one of the important elements in this model.
- About Different types of Credit Score – First thing that you need to understand is that there are multiple types of scores. For instance, FICO has different models with varied score ranges. If you have your FICO from your lender, chances are that you won’t get the same score from another lender as well, despite using the FICO model. You should not be bothered about the number. Instead, you should be concerned about the positioning of your score on the risk model and the things that may impact that risk.
- About Carrying Debt to Build Credit – I am going to discuss this point with the help of an example. Ms. Stone, as a result of a divorce, lost her home. She really seemed determined to build her credit once again and with this feeling she took a secured credit having a limit of $500. She decided to make minimum payments thinking having debt will have a positive effect on her credit score. But she maxed out her card and she ended up blowing her credit and carrying debt. Ideally, all that was required was to make the full payment and it would have helped her to build a good credit as well.
- About the Treatment for Medical Bills – No discrimination is being made on the basis of your medical bills by the credit agencies and they are not reported to these agencies unless the bills are forwarded to the collection agency. If such thing happens, then the medical bills are also treated like any other collections. Be informed, they have seriously negative nature. The more recent the bills are, the more it will have the chances of affecting your score.
- About Significance of Your Utilization – While measuring the credit scoring system, utilization is considered as a key measurement. It is capable of bringing about a significant change in your score in a short span of time. The utilization percentage can be easily calculated, all you need is to divide your credit card balances with the total credit and should be divided by 100.
If you have a higher percentage, you get to earn lower points in that particular category, entirely depending on the scoring system. But, on the other hand, if it is on the lower side, it will prove beneficial for your score.
Things you should know about Credit Score
The lenders usually have a look at your credit score in order to measure your capability of paying back the money they lend you. The credit score ranges from 300 on the lower side and 850 on the higher side. Make sure you have maintained a credit score of more than 700, once it is shifted below 600, it will be hard to get anyone to lend you money.
Let me discuss six important things you should know about your credit score –
- Credit Score influences your purchasing – You credit score will influence the interest rate that the credit card companies will offer you, which is the amount you will pay for borrowing money if you are having a revolving balance. But, there is no limitation for the non-creditors to use the credit scores.
- Be careful about the credit card companies – All those credit card companies claiming to raise your credit score charge high prices from you. They will charge you for providing services like – making a correction in the credit report in case of any inaccuracy. On the other hand, various certified credit counselors really help you in making significant improvements to your credit worthiness.
- Do credit comparison – Make sure you have shopped around for better loan terms, mainly when you have a low score. Every lender will have different criteria to decide the loan terms, even when the same credit score is being used.
- Make behavioral changes – Some of the common methods used for the calculation of the credit score are high credit card balances, missed payments, and personal bankruptcy. Make sure you know that it is much easier to bring down your score instead of raising it. Let us assume you have made a couple of late payments, this will bring down your score considerably and it will take a year or so to bring back to where it was before.
- Credit reports and credit score are different – Credit score is calculated by having the details from your credit card reports. These reports usually comprise of debt collection accounts, public records, credit accounts information, and various other things.
- Having Credit is Important – If you are looking to have a credit score, it is important you have experience in the loans and credit. However, there is no need to jump straightway into having a mortgage to start your credit history. What you can do is to start small and doing things such as paying for internet, power bills, and rent, etc.
How to improve your credit score?
10 Tips to Fix Poor Credit & Raise Your FICO Score
Yes, if you are planning to improve your credit score, then it will not be a smooth sailing. Make sure you don’t make the mistake of thinking the credit score as a car where all you need is to rev the engine and you will instantly see the result. Credit score is pretty much like your driving record where your past behavior really matters instead of your present actions. So, let us discuss some of the methods through which you can improve your credit score –
- Credit Card Balances – One of the key elements in your credit score is how much revolving credit is there versus how much you are using it. If the percentage is smaller, it will prove beneficial for your credit rating. You can boost your credit score by paying down your balances and ensuring that you keep the balances low as well.
- Get rid of the debts – When you unload your debts, it helps in raising your score via cutting down your overall debt and bringing down your credit utilization rate. Make sure you have raised your credit limit, shuffled your balances, and paid off your debt before applying for a fresh credit card.
- Open a fresh account – If your credit card issuer don’t seem interested in offering an increase in the credit, you can go ahead and apply for a new credit card from some other user. It will lend a helping hand to your credit utilization.
If you have a credit worth $10,00 and a balance of $5,000, you can have 50% credit utilization rate regardless of whether you have these amounts on one card or on multiple cards.
- Avoid using a credit card – Make sure whenever you are out to buy something, avoid paying from your credit card. You have to make sure that the credit utilization is not over 30%.
- Raise your credit limit – If you are finding it hard to manage your credit card, you can always ask your issuer to increase your credit limit. Usually, the issuers grant the good customers with the increase, so choose a card having the best history. Remember, if you request for an increase in the credit line then it requires a strict credit inquiry. So, prepare yourself to witness a temporary hit to your credit score.
- Clean your credit report – It has been observed more than 50% of the consumer credit reports either have errors or inaccurate. Unfortunately, it can cost you a maximum of 50 credit points. So, make sure you have checked your credit report for the errors. For this, you can make a request for a free credit report from each of the three key credit bureaus – TransUnion, Experian, and Equifax. When your credit report has become error-free, your credit report will show the effect within a month.
What are the habits that help increase the credit score?
There are multiple benefits when you have successfully maintained a high credit score. Probably, one of the best benefits that you get to enjoy is to have a home loan and have the best terms as well. If you are having an average credit score, you may be eligible for a mortgage, but with a high score, you have more chances of getting a better interest rate along with better terms.
It really comes handy to know more about the people who have been successfully maintaining high credit score, so that you can also follow their footsteps –
- Minimal or no Balances – Having minimal balance will surely come handy. If you are making timely payments each month, this will show your seriousness towards your finances and you have the proficiency of maintaining low balances. There have been recent changes to both TransUnion and Experian and now you can have a look at the trending data. These two well-known companies can now have a snapshot of credit history and get to know whether you are making a minimal payment or you are paying off your credit card on a monthly basis.
- Paying off on time – Paying off your student loans, mortgage, car payments, and credit cards on time, is important to have an impressive credit score. Even if you have made a late payment once then also it can hit your credit score. Making timely payments, every time, will boost your credit score over time.
- Having a lengthy credit history – Let us take an example of your friend, if he is having a credit score of 800 then he must be having an account history of more than 11 years and on the other hand your second friend having a score of 65 will have an average account history of 7 years. So, if you planning to open multiple new accounts at once can significantly shorten your average age of your credit history. Moreover, closing old and inactive accounts can also hurt your credit history.
- Maintained multiple credit lines – If you really want to build your credit, credit cards really play a vital role in it. It is necessary to have a balance on your credit card in order to have a good credit. By using your card each month, you can easily avoid paying interest and then paying off the complete balance. This will surely assist you in avoiding high-interest rates while building a good credit score.
So, the information discussed above will surely suffice your hunger to know more about credit score.