Many people are unaware of the credit scoring system, let alone their credit score until they try to buy a house, get a business loan, or make a large purchase. According to consumer.ftc.gov, a credit score is a number that represents a rating of how likely you are to repay a loan and make the payments on time.
Lenders calculate your credit score using the information in your credit report, like your history of repaying the money you borrowed, the types of loans you’ve had, how long you have had a particular line of credit or loan, and how much total debt you owe.
Each person has a credit score that is unique to them. If you’re married, each of you will have a separate score, and if you’re co-signers on a loan, both of your scores will be examined.
The riskier you appear to a lender, the less likely you are to get approved for credit or, if you are, the higher your credit will cost. To put it another way, borrowing money will cost you more.
Also, read Car Financing Basics.
Credit Score Ranges
Scores vary from 300 to 850 on a scale of one to ten. When it comes to locking in an interest rate, the higher your credit score, the better credit terms you’re likely to get. Credit ratings differ for a variety of reasons, including the company that provides the score, the data used to calculate the score, and the process used to calculate the score.
Because not all lenders and creditors disclose information to all three major credit bureaus, credit scores issued by the three major credit bureaus, Equifax, Experian, and TransUnion may differ.
While many people report to two, one, or none at all, others may report to two, one, or none at all. Furthermore, the credit scoring models used by the three major credit bureaus, as well as those utilized by smaller organizations that generate credit scores like FICO or VantageScore, are all different.
Credit Scoring Criteria
Let us do a general description of the criteria that credit scoring models take into account, having in mind that there are numerous credit-scoring models to choose from:
When a lender or creditor examines your credit report, one of the most important questions they want to know is, “Will this individual repay me on time if I give credit to them?” Your payment history – how you’ve repaid your credit in the past – will be one of the factors they analyze.
Credit cards, retail department store accounts, installment loans, auto loans, student loans, finance business accounts, home equity loans, and mortgage loans may all be part of your payment history.
Used card vs Available card
Another consideration for lenders and creditors is how much of your available “credit limit” you are utilizing. Lenders and creditors want to see that you can utilize credit responsibly and pay it off on time. Credit scores may be impacted if you have a combination of credit accounts that are “maxed out” or at their limits
Other factors include the length of credit history and hard inquiries which focuses on an active period of your credit cards and a response generated from your previous credit applications.
Because everyone’s credit experience is unique, there is no one-size-fits-all credit score. However, you will not begin with a score of zero. You simply will not have a score.
How to Improve your Credit Score
Because your credit ratings aren’t calculated until a lender or another institution asks for them to gauge your creditworthiness, this is the case. Excessive credit scores can be aggravating, therefore it’s best to keep your credit score as high as possible at all times.
However, deciding where to begin might be challenging. Whether you’re starting from scratch or trying to improve your credit after a setback, the following tips should help:
Avoid Missing Payments
One of the most essential criteria in determining your credit ratings is your payment history, and having a long track record of on-time payments will help you attain good credit scores. To do so, make sure you don’t go more than 29 days without making a loan, or credit card payments that are more than 30 days late might be reported to the credit bureaus, lowering your credit score.
Setting up automatic payments for the minimal amount required will assist you to avoid skipping a payment (as long as you don’t let your bank account go into overdraft). If you’re experiencing problems paying a debt, contact your credit card company as soon as possible to discuss hardship options.
Create a Credit File
The first stage in growing your credit file is to open new accounts that will be reported to the major credit bureaus most major lenders and card issuers report to all three. You can’t begin building a strong credit history until you have accounts in your name, so having at least a few open and active credit accounts can help.
Accounts that are past due should be paid as soon as possible.
Bringing your bills current could help if you’re behind on them. While a late payment might stay on your credit report for up to seven years, keeping all of your accounts up to date will help you improve your credit scores. It also prevents additional late payments from being recorded on your credit report, as well as late fees.
Talking to a credit counselor and enrolling in a debt management plan (DMP) could be a useful alternative for those struggling with credit card debt. The counselor may be able to negotiate cheaper payments and interest rates with card issuers, as well as bring your accounts up to date.
Also, read Mortgage Refinancing Explained.
What is a Good Credit Score?
Credit scores between 580 and 669 are regarded as fair; 670 to 739 are considered good; 740 to 799 are considered very good; and 800 and higher are considered exceptional, depending on the credit scoring methodology. You can have a credit score of 850 if you work hard enough.
House loans may demand at least a 620 credit score, although vehicle loans may require slightly higher scores, such as 661 and above. Each credit bureau receives a copy of every payment you make on a vehicle loan.
When you pay your auto loan on time each month, your credit score will improve at major milestones like six months, one year, and eighteen months, depending on how you choose to pay.
A good credit score is required for the majority of the loans that are out there. Follow the tips to increase your credit score and increase the number of lenders wanting to give you loans.