Credit score

A credit score is a statistical numerical value that depicts the person’s creditworthiness. This statistical number is based on the credit history of a person, usually taken from credit bureaus. Credit history includes total debts level, open accounts, repayment history, and some other factors. Credit scoring has become very important with a dramatic increase in applicant credit in recent years.

Credit refers to the amount of money that is lent to the applicant which must be then repaid at a specific interest rate, in installments. Different bodies like banks, utilities, mail order companies, and various other organizations make decisions about whether to grant credit to the applicant or not. (1)

This figure helps the lender to evaluate the borrower’s eligibility, his behavior of repaying his previous debts. The borrower qualifies for the loan after a good credit score. The credit score of a person also determines the interest rate and credit limit to be given. The better the credit score, the more trustworthy a borrower is considered by the potential lenders. (2) The value of credit score ranges from 300 to 850, however it also depends upon the states. In Canada, a credit score can go up as high as 900.

How is a credit score calculated?

There are many credit scoring systems. Among them, the most common is the FICO scoring system. Fair Isaac Corporation or FICO was created in 1958. Different credit bureaus use the credit scoring system made by FICO. Each is called by a different name. For example, Equifax uses the beacon score, and Experian uses the Fair Isaac risk model.

Vantage score, a unified scoring system, was created by three well-known credit agencies in March 2006.

The credit score is calculated in five major categories.

  1. Payment history counts for 35% of the total score, late payment will harm the track. tax liens and Bankruptcy also influence a credit score.
  2. The second category is the credit-to-debt ratio, which accounts for 30% of the total score.
  3. Credit history is the third category which accounts for 15%
  4. The fourth category is about the new credit a person demands frequently. It has a negative effect on credit score specially when lenders refuse to grant a loan. It counts for 10% of the total score.
  5. Last counts for 10% which is new credit.

Where to check credit score?

Credit scores are checked in various ways.

  1. Visit a scoring website. There are various websites which offer free credit score. The customer needs to sign up with attention. Some sites give a free educational score to the customer.
  2. Checking with lenders. Many companies offer free credit scores that one can check by logging into the account.
  3. One can also check the credit score by visiting a nonprofit credit counselor.

The company that keeps the record of credit is called a credit agency or credit bureau. In many states these credit bureau allows the customer to check their official score for free once per year. The three major credit agencies are Equifax, TransUnion, and Experian. These agencies use FICO or Beacon scoring system. It is important to check credit scores from these agencies specifically because that is going to be the most accurate representation of what the credit actually is. But these bureaus offer for free once per year and it is important to keep track of credit on a regular basis. Some other companies keep track of credit score and send them monthly to the customer. Borrowell and credit karma are the companies that send the monthly records and quarterly updates to the customer which is extremely important.

Why to check credit score?

A credit score is not just a number; it is a report of all the credits that have been taken out in one’s name.  So this is also the way to check for fraud. Sometimes a mistake is made by reporting agencies.  The person pays every bill on time and the report says that the debts have not been paid on time then that could be a big dent in the credit score. A person easily suffers mistakes like this if he does not check his credit regularly. It could be months or years until someone knows this and by then it would have disastrous consequences.

Good and bad credit score.

Every creditor has its own range of credit scores. FICO range is used most often. This is

  • 800 to 850 is considered Excellent. This explains to lenders that the customer is an exceptional borrower
  • 740 to 799 is considered Very Good. This explains to lenders that the customer is a dependable borrower
  • 670 to 739 is considered Good to lenders
  • 580 to 669. Many lenders still consider it fair and are ready to approve a loan to customers with this score.
  • 300 to 579 is considered Poor. This explains to lenders that the customer is a risky borrower.

If a person is thinking of getting a loan then this is a really important 3 digit figure to keep track of. A person with a good credit score such as more than 700 can get a higher borrowing amount with a lower interest rate. Lending institutions charge interest on the borrowers having a credit score of less than 650.

Ways to improve credit score.

Credit score may rise or fall once the information is updated in the customer’s record. Through the following steps, one can improve his credit score.

  • Payment of bills on time: paying bills on time for six months imparts a noticeable change in the credit score.
  • If someone owns any credit card account, he must inquire for a credit increase. If the account is in a good reputation, then an increased credit limit should be granted to the customer.
  • If someone is not using a credit card, then it is better for him to stop using it than closing the account. This act may effect credit score, all depends upon credit limit and age of card.
  • Communication with the credit repair companies helps the person when he does not have time to improve credit score. These companies negotiate on a person behalf with creditors and credit bureaus.

References

  1. https://www.experian.co.uk/consumer/experian-credit-score.html#:~:text=A%20credit%20score%2C%20also%20known,of%20you%20paying%20credit%20back.&text=The%20higher%20your%20credit%20score,Credit%20cards%2C%20loans%20and%20mortgages
  2. https://www.usa.gov/credit-reports