This is an article “All About Credit Score” by Marc Primo.
When talking about credit score, it all boils down to a three-digit number. That number can either grant you loans by determining how good your interest rate is or deem you as someone deep in debt. Fixing a bad credit score may be difficult, most especially if you don’t know the first thing about how this financial system works or if you simply don’t give a damn about your credit history. Getting housing or auto loans, and even borrowing money for emergencies, make it an important aspect that can lead to your financial wellness.
For many, keeping a good credit score simply means being religious in paying the bills, and settling credit card balances on time to avoid incurring penalties or interests. For the nitty-gritty, below are some of the more important things you should know about maintaining good credit score.
How does it work?
Data is one of the most important commodities today and it is also what is used to determine your credit score which ranges from 300-850. Basically, this number determines your capacity in paying off loans and gives lenders a reliable analysis of your credit history. There are five categories wherein a credit score can fall, namely:
Very poor (300-580);
Fair (581-670);
Good (671-740);
Very good (741-800); and
Exceptional (801-850).
When you take out a loan, make payments, or are subject to credit report checks, all your information is entered into an algorithm that determines which category you fall under. What you have to do to maintain or increase your credit score is to keep a steady flow of flawless payments to various loans so that over time, your credit score will increase. Missing payments can drastically lower your score, and default payments can hurt your score with years before you can erase your bad history. This can be truly difficult for you especially when you need money for health emergencies or investment opportunities.
Who determines credit score?
The Fair Isaac Corporation or FICO is one of the main credit scoring tools used by lenders since the 1980s to determine a borrower’s credit score. Their exact math formula is kept in absolute secrecy. FICO can come up with two different credit scores for when you apply for mortgage loans or a simple store card. However, it is just one of the many credit score report providers out there and each one suggests the same methods on how you can improve your credit score.
Most lenders also trust VantageScore-- a joint venture of Equifax, Experian, and TransUnion which was launched in 2006. The glaring difference between FICO and VantageScore is that the latter uses factors such as payment records, age and credit type, credit percentages, the sum of all debt, recent credit behavior, and your available credit to determine your credit score while FICO only considers fewer factors. VantageScore puts more importance on payment history than FICO but it does not necessarily mean that it’s more reliable than the other providers available. However, VantageScore provides lenders with more data to work with when considering a borrower’s credit score.
What factors should be considered in keeping a good credit score?
Mainly, there are only a few factors you should consider when trying to improve your credit score via FICO. Your payment history makes up 35% total score, while amount owned (30%); credit age (15%); new credit (10%); and type of credit (10%) make up the rest.
How to improve your credit score?
You can’t raise your credit score overnight. Instead, it will take a lot of unmissed payments to slowly increase it over time. Lenders also do not have the capacity to instantly report payments to credit bureaus, so your payments will not reflect instantly in your credit report either. What you can do is try to keep your payments up-to-date, pay off all your debt, refrain from closing old accounts, limit your credit applications, and avail of credit boosts so you can report positive payment history. Doing this can improve your credit score faster than just simply being diligent with your payments.