A credit score is a numerical representation of your credit worthiness that puts it into a 300 to 850 range to enable lenders assess your ability to repay a loan on time. The credit scores can start as low as 300 and go as high as 850. Here again, more is better: the higher your score on a given dimension, the better you are at it. There is some debate as to what constitutes a ‘good’ credit score, but 670 is typically seen as a good score. In fact, if your score is 670 or higher, then you can consider your credit is good. What that means is that creditors should consider you as a good client who will always pay the debts as and when due.
It is therefore very important that you understand what makes up your credit score.
FICO and VantageScore are the two types of credit scores that are used mainly by lenders. Both consider five main factors from your credit report to calculate your score:Both consider five main factors from your credit report to calculate your score:
Payment history – If you pay your bills and your regular credit cards on time. This usually affects it most, particularly in your case, as shown in the comparison between your weighted GPA and your unweighted GPA. In case you have the record of the late payments, then, for sure, your score will be decreased. On the other hand, the negative information that is received earlier has a lesser effect as it decays with time. Credit utilization – It is the degree of credit that has been used by an individual against the available credit limit. Ideally, is best to keep your credit utilization below 30 percent to avoid taking a hit on your credit rating. Credit utilization rates - The ratio of the total credit you’ve been given to the total amount of credit you’re currently using. These are some guidelines on credit card usage that could help you get a good credit score: It is also important to note that new accounts may have a negative impact on your credit score. Hence, relatively long credit histories suggest that the borrower has the ability to handle credit responsibly with time. Credit mix – The kind of credit that you have in your line of credit including credit cards, installment loans, finance company accounts, and real-estate secured credit. Number of new accounts – How many new accounts have you opened recently. This means that opening several new credit accounts within a short period is detrimental to your credit rating.
This is the reason that each scoring model considers these categories in a different way. However, if you have had credit accounts for a long time, having proven that you are responsible with that type of credit, your score will be higher.
Understanding What is Regarded as Virtuous or A Vicious Credit Score
Credit scores fall into different ranges and categories:Credit scores fall into different ranges and categories:
800-850: Exceptional 740-799: Very Good 670-739: Good 580-669: Fair 300-579: Very Poor
Credit scores of 670 or higher symbolize a low-risk borrower to the lenders as they are likely to pay back the loan on time. You should fit most of the requirements of loans and get reasonable interest rates. Obtaining credit scores of 740 or higher make you appear even more appealing to the lenders while seeking for loans and credit cards.
If your credit score is less than 580, most of the lenders will consider you as high-risk borrower. Your chances of receiving credit approval will significantly reduce and this means that obtaining credit will become more difficult. But if approved, you will pay a higher interest rate than you would for a standard loan. Those who have scores below 600 usually do not meet the required credit standards of a traditionally funded mortgage.
The possibility to get answers on how is my Credit Score calculated has increased significantly through the years.
It is important to note here that the formulas used in determining credit scores cannot be accessed by the public. That, in essence, is the exact method and you can well imagine that it is more closely guarded than any military secret. However, when it comes to weighing the attributes, FICO and VantageScore assign the most significant weight to payment history. This determines 35 percent of an average FICO score. The second factor that makes up your credit score is the amounts owed, which is valued at 30 percent.
The scoring models look at the information presented in your credit report and provide an approximate probability of the risk for other lenders. The details of your past repayment pattern are analyzed to guess how often you will fail to pay back the new accounts of credit. The credit circumstances of the borrower are more relevant if they are recent than more dated information.
What do the labels Higher Scores Better mean?
The higher the credit score that you possess, the lower the likelihood of becoming a credit risk to potential creditor. The credit scores make the borrowers to get more credit and to pay less to get the credit. They may receive 0 percent intro APR credit card and loan offers. The prime borrowers with high scores also use lower interest rates to borrow money for mortgages, auto loans and HELOCs.
In the mortgage lending process, applicants with better credit can secure conventional Home loan. While the ones with the lower scores may be forced to find an FHA, VA or subprime loan. These loans can be described as having a small down payment but are expensive in terms of interest rates and other charges.
Credit card as well as loan companies also use credit scores in determining credit limits as well as the interest rate to charge. In the case of those who borrow, the better ones are given higher limits and lower APRs. Low risk debtors have low balances and high rates while the high risk borrowers find themselves with low balances at high rates. This means that your score can greatly determine whether or not it is cheap to borrow money for instance for the purpose of making a big purchase.
What measures can one take to increase his/her credit scores?
No matter where you fall on the credit spectrum, there are ways to boost your score over time:No matter where you fall on the credit spectrum, there are ways to boost your score over time:
Always paying all bills on time from now on – delinquencies will also harm your credit significantly if you are still establishing it. Credit payment history contributes to more than one-third of credit scores. Hence, it is most advisable and beneficial to settle all accounts before their respective due dates. If you do not want to remember various deadlines, use autopay.
It’s important to keep credit card balances low – high balances affect the credit utilization ratio and consequently lead to a low credit score. Ideally, each balance should remain below 30% of the credit limit on the given credit card. If possible, one must pay in full every month .
Do not shut all credit cards – The age of credit limits is equivalent to 15 percent of the FICO score. Do not cancel your oldest credit cards, even if they are no longer used regularly. As a result, do not cancel your oldest credit cards accounts even if they are not often used anymore. This help in building longer credit history because of their presence in the credit reports. It is better to keep old accounts active rather than surrender them.
Avoid applying for new credit - Each new credit application credit can affect your rating for some period of time. As credit reference is made within a short period of time when applying for new accounts, this will be considered as high risk and hence the score will reduce. It is therefore advisable to limit the number of credit applications whenever possible.
Dispute reporting mistakes- You should check whether your credit reports have wrong information or old data, and if the information is wrong, you should dispute the information so that it can be corrected or deleted from your credit report. You cannot delete accurate negative informations. However, oversights that work for you can improve your results when corrected.
How Long Does It Take to Change Your Credit Score?
The majority of the adverse credit information appears on your credit reports for the next seven years. However, the effect of this approach is not as profound as it is for the first few months. For instance, a bankruptcy could reduce the score by 100-150 points at first and then slightly degrade slowly, so it is critical to prevent this from happening. But that FICO penalty will only be to the tune of around 100 points after a couple of years and 50 points after five years.
It is important to note that there is no shortcut to improving your credit rating when it is bad. It takes a long time to rebuild credit and one needs to be very patient and determined. Moreover, while all other bills are paid on time in the future and credit card balances are kept low, scores may begin to rise within several months. It should be possible for one to note significant score alterations in the second year of responsible credit behaviors. These are good scores that normally come after at least three to five years of hard work.
The higher the number of credit activities that meet proper credit practices including paying your bills before the due dates and the utilization of little amounts of your total credit limits, then the higher the credit score that the credit rating agency assigns to you. Making payment plans enables one to have automatic payments for bills which makes them timely. Credit monitoring services also ensure that you are updated on events that will benefit or disadvantage you in terms of score.
Just remain financially responsible and wait for your credit rating to begin to improve slowly over time. Thus, reap the benefits and the amount of money that you save when you have obtained a better rating in your credit.
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