Understanding Your Credit Score
To put it simply, we can say that a credit score shows numbers ranging from 300-850. It is calculated on the basis of a client’s credit history. Your credit score has a strong impact on your financial life. Lenders are more trusting of a person with a high score. They make decisions on the basis of credit score as to whether or not they should accept loan requests.
How is a Credit Score Calculated?
Banking and non-banking financial companies consider a score above 750 to be ideal. The credit bureaus calculate your credit score. And each credit bureau uses its own algorithm to calculate the credit score. Your score is generally calculated on the basis of factors like payment history, credit utilization, and credit age and type.
Credit score calculation formula:
- Payment history 35%
- The amount owed (Debt level) 30%
- Length of credit history 15%
- Account inquiries 10%
- A mix of credit (How many types of credits in use) 10%
What is a Credit Report?
A credit report shows the record of your borrowing history, how much you have paid back, and how much you still owe.
The following list appears on your credit report:
List of debts and history that you have paid: It includes credit cards, car loans, and student loans.
Any bills referred to a collection agency: like utility or medical bills that you did not pay or paid significantly late.
Public-record information: tax liens and bankruptcies that may be linked to you
Inquiries made about your creditworthiness: this represents how many inquiries were made about your credit and if you were given credit based on the query.
Difference Between Credit Score and Credit Report
The credit bureau uses information from your credit file to calculate your score. Landlords and financial companies use this number to assess your credit risk at the time of application.
While your credit report is your financial history, which shows a summary of your financial reliability, your score is a calculation of that information.
Why Should You Maintain a Good Score?
You are considered a low-risk borrower if you maintain a high score, which raises your chances of getting a quick loan.
If you have a good score, the lender will offer you impressive rates on your loan, and you can also negotiate on available rates and get a better deal.
Credit cards are considered an important financial lifeline, and financial institutions will check your score before offering you a credit card.
How to Improve Your Score?
- Keep an eye on your credit score
- Pay ALL your bills on time, not only credit cards and loans. The credit bureau will not always receive a report when you are paying some bills on time, but if you fail to pay on time, they can appear on your credit report and can affect your score.
- Too many credit inquiries for a credit card or loan can have a negative impact on your score; only apply for credit inquiries when it is really necessary.
- Don’t close an old credit card, keep using them these cards will show that you are maintaining a long term credit history
- If you are unable to pay full payment once you should pay twice a month, making sure both payments have processed before the due date.For more help improving your credit score, read my post Do You Know How to Raise Your Credit Score?