What is a Credit Score?
If you want to take a mortgage loan, get a credit card or buy a car with a loan the lender companies will require you to have a high credit score.
But first, let’s define what Credit Score means and how it works.
Credit Score is a number representing your trustworthiness and credit history.
It ranges between 300 and 850. The higher the credit score the more reliable you seem to the creditors and the less risky the idea of providing you with a loan feel. Thus, a higher number is a sign of your trustworthiness showing that you will be able to follow the agreement and pay your debts responsibly.
Monitoring your credit score is highly important, which, by the way, may change over time. The calculation of your credit score is usually based on a special algorithm. Every time when the lenders request it from the credit score reporting agencies, they choose a scoring model they prefer to receive your score in.
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The following 5 components are considered while calculating the score:
- your payment history (35%);
- amounts you own (30%);
- your credit history length (15%);
- the number of types of credits you have (10%)
- and account inquiries (10%).
Where to find your score and report?
Now, when you know what a credit score is, you need to get yours, to be able to make further, more informed decisions. TransUnion, Equifax, and Experian are some of the main bureaus where you can get your credit reports from.
Once every year, AnnualCreditReport provide your credit report for free. If you want to have them all together at once, it’s your choice. But it is advisable to take those at different times throughout the year to be able to track the changes in your score.
Your Credit Score Defines Your Rating
The worst score you may have is between 300-579. It is rated as “Very Poor” and in case of having a score like this, you will most probably not be approved for credit.
People having a score of 580-669 are considered to be in the “Fair” rage. They are also known as subprime borrowers. Although they are not in the worst position, they obviously need some improvements in their credit score and history.
The next group of people scoring 670-739 have a high level of trustworthiness. This is the “Good” rating.
The “Very Good” applicants basically score 740-799. If your score varies between these numbers you can expect to get better than usual rates.
Finally, the “Exceptional” applicants have their scores between 800-850 and they get the best possible rates.
My score is 610. What’s next?
If you’ve already managed to take a look at your reports, you’ve probably shaped an understanding of where you stand at the score scale. The more information you have the easier it will be for you to plan your next steps.
Basically, it is okay to come up with credit report results a little different from what you’ve expected. That’s because your score is a constantly changing number and it’s based on the actions you take.
Now let’s see what happens if you have a surprisingly low score. To be more specific, we will discuss the case of having a score of 610.
As you can tell from the above information, this score of 610 should be improved in order to get you out of the subprime borrowers’ list and ensure better rates for you. Most of the actual credit scores usually vary from 600 to 700, so you are not alone in this boat.
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Which factors affect your credit score?
Let’s take the example of the FICO credit score model and see how it’s calculated. There are different credit score models but the results and the calculation process are more or less going to be the same.
The main factors that affect the credit score include the applicant’s payment history for loans and credit cards, credit utilization, the length of the credit history, types of the current credit, your overall debt, and account inquiries.
These factors make the overall score and are actually weighted in different ways based on the beliefs and priorities of the agency. Let’s take a closer look at each of them.
- The payment history for loans and credit cards: The most powerful impact on the final credit score has your payment history. It is very important to make at least the minimum payments and do it on time, on a monthly basis.
- Credit utilization: Credit utilization shows the amount of available credit being used at that moment.
- The length of credit history: The type, number and the age of your credit accounts matter. In order to make the length of your credit history look good you should always keep your old accounts open and in good status.
- Types of current credit: It is also important to have a smart mix of credit types in use. Creditors and lenders like to see responsible use of credit type mix. For example, while having only a single credit card, adding a credit building loan will be a smart decision. In case of having nothing on your credit report except a student loan and consider becoming a credit card applicant.
- Your overall debt: Obviously, the amount of debts you owe does affect your credit score. The bigger the amount, the lower the score.
- Account inquiries: Your credit score may also decline because of the number of account inquiries you make in a short period of time. As we’ve already mentioned it is good to have multiple and different types of credit lines. However, if you make too many inquiries in a short period of time you risk portraying yourself as someone who asks for a credit card to cover the payments from the previous credit card or loan. So, it is advisable to be cautious when making too many inquiries. Pay attention to your credit history and see if your inquiry may portray you as a less desirable borrower.
Improving your credit score
The ways of improving your credit score may differ based on the weaknesses of your credit experience. A good strategy will be checking your credit scores online and pay attention to the information about the affecting causes.
Then you can easily conclude what kind of changes are needed to be made.
– Stay responsible
The lending companies mostly take a look at applicants’ past experiences in order to predict how risky or reliable may they be in cooperation. That’s why it is very important to act responsibly and pay your bills always on time and fully to avoid the negative impact on your score.
This not only refers to loans and credit cards but also the monthly household payments you have to make.
If you are worried about forgetting any of the due dates, try using mobile applications to set reminders for the payments.
Another important thing to remember is that if you were late on any payment you should try to make the payment as soon as possible, even after the deadline. Your late payments will still appear and affect your score during the upcoming seven years. However, the good news is that the older that information becomes, the less effect it will have on your final score.
Obviously, not all of the factors have the same importance for your score. As mentioned before, the most influential factors include your payment history and credit utilization ratios. These 2 make 70% of your overall score.
What’s more, taking into account that the credit score is valued based on your latest information, if you try to follow these tips you will be able to improve your score over time.
– Do not use available credit too much
Credit Utilization Ratio shows how much of the credit you really use. It helps the creditors understand if you depend on just the credit or you are actually going to pay it back. Usually lower utilization rate is better. Let’s say your rate is 20%. This means that you are using only the 20% of your credit limit and you don’t really depend on that credit amount because you have other sources of income.
On the other hand, if your utilization rate is 78%, it means that you use all 78% of your credit limit. This shows that you depend on that money for some or most of your transactional activities.
The lower this rate the higher your credit score. However, this doesn’t mean that you shouldn’t use your credit at all. If the money is just sitting there in your credit card it showes that you don’t need credit at all.
So, if you are not using the money, it’s only reasonable for them to think that someone else could put it to a better use. That’s why your score decreases showing the creditors that you don’t need credit money, and therefore you become an undesirable borrower.
Basically, to be able to maintain good utilization rate you should try to put your credit card to use for every now and then. And you should also avoid looking dependant on that money by spending only less then 20-30% of the amount.
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– Show History
People usually can’t wait to get rid of a debt or a loan. Surprisingly, keeping them may increase the credit score.
The answer is simple. The lenders are looking for applicants with responsible habits. And what can ensure you have those features if not a debt paid off on time.
– Get engaged in Score-Boosting programs
While making all of your past payments done successfully and before the due date, you may also consider taking advantage of Score-Boosting programs.
One example is BoostAmerica, which allows you to attach your utility payments to your report. While being analyzed by lenders it may also ensure a higher score for you.
– Escape having denied applications
Denied applications tend to lower your score. This is why it is important to evaluate yourself as an applicant and understand the likelihood of getting your new credit card. Again, by getting a rejection you will put your credit score at risk.
– Place charges on your cards
It is important to make sure you don’t have old cards that are not in use. They can actually decrease your score and you need to show that you are using them on a regular basis.
So, you may keep a small amount of money on these cards and pay for some monthly online services with them (e.g. Spotify, Netflix, etc).
– Pay twice a month
People usually think that if they are making their payments on time, everything should be perfectly fine. However, it’s not always the case.
Once a month, creditors submit your loan and payment reports to credit reporting agencies which then use it in your credit score calculations.
As we have already mentioned before, it is better to keep lower utilization rate of your credit account. If you are making your monthly payments more than once a month, it lowers your account balance before the due date of your payment.
This means that your utilization rate will be low no matter when the report is submitted and when your score is calculated showing that you can be trusted with repayments even if you spend a lot.
– Raise the credit limits
How can raising the credit card limit help you get a better score? The aim of doing this is making a higher limit and keeping your spending under it. By doing so you will be able to show a lower utilization ratio.
However, it is only recommended to do so if you are sure your new card limit won’t seem too appealing for you to start overspending again. What’s more, you do not need to do this when your score goes down due to missed payments.
It may seem that you are in financial crisis and thus are trying to raise the limit, which is not the best way to improve your credit score.
Instead, do it when you are able to make your payments on time and you don’t have any missed deadlines.
– Stay Patient
A good credit score can be ruined immediately, however, building it will require a lot of time. Thus, you really need to be patient and keep on making your payments on time and acting responsibly. The longer you will do this, the better results you will achieve.
To sum up…
A credit score is a number that lenders rely on while making decisions about giving you the requested mortgage, credit card or a car loan. You need to always monitor your credit score and control it as much as possible.
The credit report can be taken from credit reporting agencies once a year for free and you can choose taking them all together or separately. For more simplicity, you can also check it via www.creditkarma.com which maintains fresh and up-to-date information all the time.
In case of having a score of 610 or worse, you need to be aware of your report strength and the factors that may affect your score. Those factors include payment history for loans and credit cards, credit utilization, the length of the credit history, types of the current credit, your overall debt and account inquiries.
Any of these can be a starting point for improving your score. Again, some smart strategies may help you increase your score. But the important thing to remember is that some changes may appear soon, but getting an excellent or even a good score is going to take a long time.
Besides the mentioned ones, the biggest tip keeping your score from declining. You need to act responsibly about all of your bills no matter if it is a utility payment or a mortgage.
You can keep mobile applications or tools reminding you about the due dates and make it easier for you to complete them on time.
Remember that ruining a good score is easy and earning a good score takes a lot of time.
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