- Michael T. Berger, MBA
Your Credit Score Demystified
Have you been hearing of the cliché credit score and you have no idea what it means? Or better still, you know what credit scores are and you’re looking to learn more about maintaining a good credit score? Whatever your reason, this article has all you’ll need to know about credit scores. Hopefully, you’ll get the hang of this and build a good credit score that will help you qualify for certain benefits. So, what are credit scores? We are happy you asked. Read on and you’ll be glad you did.
What is a credit score?
Without mincing words, a credit score is a statistical analysis that is used by lenders to determine a person’s credit worthiness. It is very important because it helps lenders determine if a person will be able to repay his/her debts. In today’s business world, credit score is such a big issue. Little wonder why organizations today generate credit scores for each of their employees with a social security number.
Essentially, credit scores are generated by companies based on data from their employee’s previous credit history. To put things in retrospect, a credit score is a three digit number that’s within the range of 300-850. What this means is that 850 is the highest credit score a borrower can achieve. What does this mean to a lender? That’s a very good question. For lenders, the higher the credit score a person has, the more financially trustworthy a person is. That’s not all- maintaining a high credit score qualifies you to get a loan up to certain amounts.
How to understand credit score While there are tons of providers that provide data for a credit scoring system, the Fair Isaac Corporation (FICO) is the most renowned credit scoring system recognized by financial institutions. According to FICO, individuals can earn a high credit score by ensuring they pay their bills on time. What’s more? Keeping a reasonable amount of debt is equally reputed to help a consumer maintain a high credit score. Remember, a high credit score pitches you to qualify for certain amounts of loans. A credit score is a key determinant in a lender's decision to offer credit. What this means is that, if you maintain a low credit score of let’s say 600, you’ll not be eligible to receive a prime mortgage loan. Plus, you may need a referral before you can get a subprime mortgage loan (which attracts higher interest charges). However, for a borrower with a good credit score of 700 and above, you’ll easily qualify for a prime mortgage loan that attracts lower interest rates. What are credit scoring factors? Many companies make it a point of duty to update their employees' credit scores every now and then. When this is done, your credit scores are bound to change depending on whether you make payments or miss a payment. To this end, below are five factors that are usually considered when calculating a person’s credit score. Payment history Payment history hugely determines a person’s credit scores. If you’re one who pays your obligations on time, chances are you’ll maintain a good credit score. If otherwise, then you’ll agree that your credit scores wouldn’t be impressive to lenders. Besides, payment history counts for 35% percent of your credit score. What this means is that, by paying your bills and other obligations on time, you would have earned 35% percent credit score.
Total amount owed This is another factor that impacts greatly on your credit score. This accounts for 30% of your credit score. To make things easier for you, the total amount owed shows how many accounts a person has and how much he owes on each of those accounts. This means by ensuring you offset your loans, you’ll maintain a good credit score on all your account. Length of credit Length of credit history is yet another factor that is considered when calculating a person's credit score. Just as the name suggests, length of credit score shows how long your credit history has lingered. This date as far back as when your first account was opened. Length of credit history counts for 15% of a score. Types of credit Types of credit are used to know if a person has a mix of different credits he is making payments for. Credits such as mortgage loans, car loans, and revolving credits are usually considered. Type of credit counts for 10% of a score. New credit Another determinant of credit score is new credit. New credit analysis a person’s request for additional credit including credit checks on new accounts. Usually, this account for 10% of the credit a score. To generate a person’s credit score, companies usually look at a person's history of on-time payment of all bills and debts owed. Credits score is very important to lenders because it helps them determine if a person has to make a deposit to obtain items or pay for other utilities. To this end, lenders will regularly review your credit scores to ascertain if they have to change your interest rate or implement a credit limit on your credit card. According to FICO, credit scores are peculiar to each person’s credit history. This means the impact of one factor on your credit score calculation depends solely on information contained in your credit report. Simply put, one factor may impact your credit score more than it would for someone with a slightly different credit report. What is a good or bad credit score? If you’re new to the credit scoring system, I’m sure you’ll be wondering what a good or bad credit score means and how it impacts you. Well, let’s make things easy for you by telling you what they both mean. Like we stated earlier, most financial organizations make use of the FICO credit scoring system. According to this scoring system, credit scores are ranged between 300-850. Notwithstanding, most credit scores are usually pitched between 600-750. For FICO, credit scores from 670 above are considered very good credit scores and will place you in a good position to receive loans up to certain amounts with lower interest rates. Bad credit scores from 300-579 will determine the kinds of loan you qualify for. Sadly, bad credit scores aren’t good for you. Besides the fact that you are only limited to certain kinds of credits, having a bad credit score usually attracts higher interest rate on loans you’re allowed to take. Why credit scores? If credit scores aren’t important, then many organization wouldn’t need to go through the hassles of updating their employees’ credit reports. For lenders, credit score reports are very important when they want to give out loans. It helps them anticipate the likelihood of an individual paying up his loan.
Credit scores, also referred to as risk scores, help financial organizations evaluate the risks that you may not be able to pay your loan as promised. Maintaining a good credit score does not only qualify you for loans up to certain amounts, it also determines how much interest lenders will charge for the kind of loan you’re requesting. This could be the difference in hundreds or thousands of dollars into paying for such loans.
HOW TO IMPROVE ON YOUR CREDIT SCORES
If you have recently reviewed your credit scores and you’re not impressed with the numbers you see, you’re not alone. There are many people whose credit scores aren’t impressive. The good news is, all hope is not lost yet; you can upturn your bad credit scores. Without further ado, here is how to improve on your credit score: Take time to evaluate your card balances If you’re serious about improving your credit score, you’ll need to watch your credit card balances. This really impacts your credit score. One factor most lenders usually consider when determining the credit score of an individual is how much revolving credit vs. much he/she is actually using. Hence, it makes a lot of sense to keep that percentage to a bare minimum. To boost poor credit score, you’ll need to pay down your balances. You’ll also need to ensure that your credit balance is as low as possible. For borrowers with multiple credit balances, merging them with a personal loan could up your credit score. Here is what you should know. Even if you end up paying your obligations in full every month, your credit balance may still be high. But not to worry. To ensure you keep your credit balance at a low, you should check with your lender to see if you can make multiple payments throughout the month. Do away with credit balances There is no doubt that having a high credit balance affects your credit scores especially when you have 4-5 credits cards. By eliminating credit balance, you will be building a good credit score that will afford you the opportunity to qualify for future credit. Remember, one of the factors used to determine your credit score is your balances on all cards. According to experts, the best way to is to reduce credit card debt is to pay off all the small balances on your cards, then choose one or two cards for future purchases. Once you have paid off this balance, you may consider moving to a balance transfer credit card. This will help you maintain a really good credit balance that will improve your credit scores. Pay your debts on time Are you serious about improving your credit scores? Paying your bills or debt on time will be a good place to start. According to FICO, not paying your bills or debts on time affects your credit scores. First, this is a red flag to financial organizations that you’re not credit worthy and you may not be able to repay any credit if given. Secondly, if your loan application is granted, you may be charged higher interest rate than someone who pays his credits on time. So, your best bet at obtaining a favorable credit score is striving to pay all credits on time. Don’t remove old debts from your credit reports We know this may sound like a no brainer, but hey! It makes total sense to leave old debts on your credit reports. Having old debt on your credit report does you a lot of good. Old debt tells lenders that you’re capable of paying off your debt. Also, if you have a history of good debt, the chances that you will have a high credit score are inevitable. So, instead of trying so hard to get old debts wiped off your credit report, it makes a lot of sense to leave it there.