Understanding Credit Scores

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Credit Score

What is a credit score?

A credit score is a three-digit figure between 300 and 850 that reflects your perceived credit risk, or the probability of timely payment. A higher credit score indicates more prudent financial behavior. Lenders use your credit score, as well as other things, to figure out how likely you are to pay back a loan. Consumers are entitled to a free copy of their credit reports from credit bureaus every year.

 

Before submitting a credit application, you’ll find resources at sites like Bills.com to further improve your undressing of credit scores and financial management. You can also start your FREE debt assessment to identify which items you are likely to be approved for. Bills.com soft search technology preserves your credit score by reducing the number of hard inquiries that are conducted on your account.

 

Now, let’s take a look at how credit scoring works.

 

Ranges of credit scores

While each credit agency has its own unique scoring algorithm, they all operate in a similar manner. Therefore understanding credit scores calculation is important. It is calculated using statistical data based on a credit report. The score usually ranges from about 350-850. The higher the number, the lower the risk.

 

Score of 720 or more – A+ (Excellent)

Score between 680 and 719 – A (Good)

Score between 620 and 679 – B (Average)

Score between 580 and 619 – C (Difficult)

Score between 500 and 579 – D (Bad)

Score less than 500 – E (High-risk)

 

Types of Credit Scores

There are two main types of credit scores.

 

Generic credit scores: Are typically used by various kinds of lenders and organizations to measure overall credit risk.

 

Custom credit scores: Individual creditors customize their own credit scores. They use credit reports and other information from the lender’s portfolio. They are either exclusive to a company or used only by certain lenders, including credit unions.

 

Factors that make up the credit score

The scoring systems consider various elements from your credit record, each with varying weights. Some examples include:

 

Payment history – 35%

Credit scores are based on payment history. It demonstrates your consistency in paying off your debt.

 

Amount of Credit Used – 30%

It’s the difference between what you owe and what you originally borrowed (or your credit limit). That is, the more you can borrow, the better.

 

Length of Credit History – 15%

As a general rule, having a long credit history is good for the score.

 

Types of Credit Used – 10%

Having a lot of different types of credit is a good way to show lenders that you are more responsible with your money.

 

Recent Searches for Credit – 10%

Numerous credit searches (e.g., enquiring or applying for credit) will appear on your credit report.

Other additional factors that may adversely affect one’s credit score include:

  • Current debt amount and type.
  • The promptness with which previous payments, including late payments were paid.
  • Your credit card balance and age.
  • Public documents, such as judgments and liens.
  • Money owed as a result of a court order
  • Money owed as a result of a tax or other encumbrance.
  • Having opened one or more consumer finance credit accounts recently
  • Bankruptcy filing
  • Involvement of a collection agency to collect a debt owned by you.

 

Smarter Habits for Better Credit

Good credit scores are the product of budgetary prudence and the development of habits over time, and there’s no quick fix. Here are some smarter habits to adopt to help increase credit scores:

  • Ensure that all the information on your credit report is correct and up-to-date.
  • Keep track of your credit card balance.
  • Keep your credit card balance low and use credit wisely.
  • Never borrow more than you can afford to repay.
  • Keep a credit card or two, but don’t apply for one every time you see one.
  • Make an effort to pay off debt rather than shifting it from one credit card to another.
  • Get a secured credit card to help you develop credit.
  • Speak with your creditor about other payment options.
  • Make timely and complete payments to creditors. This is the most effective method for raising or maintaining your credit score.
  • Pay any past-due debts. Pay them up quickly to avoid further reporting.

 

What hurts a credit score?

  • Borrowing from financial institutions.
  • Closing credit cards when capacity is reduced.
  • Credit Card Overuse.
  • Excessive credit card shopping.
  • Opening a large number of deals in a short period of time.
  • Delayed payments.

 

The Bottom Line

Your credit score can save or cost you a lot of money in your lifetime. Understanding credit scores will help in achieving a greater credit score; hence you may get reduced interest rates, which means you will pay less for every line of credit you take up. However, it is up to you to make sure that your credit is strong so that you can get more loans if need be.