Consumer Credit Score
Why Is A Credit Score Important?
Credit scores are extremely important because they affect your ability to borrow money as well as the cost of doing so. Simply put, those with higher credit scores generally receive more favorable credit terms. This will translate into lower payments and less paid in interest over the life of any of your credit accounts. They also play a role in the car insurance premiums you pay. And, unfortunately, bad credit can even make it difficult to find a job or a place to live.
What Is A Credit Score?
Your credit score is your credit history expressed as a number. It is a three-digit number, typically between 300 and 850, designed to represent your credit risk, or the likelihood you will pay your bills on time. You can also think of it as a grade for how responsibly you have managed loans, lines of credit and other financial obligations over the years. Credit scores are extremely important because they affect your ability to borrow money as well as the cost of doing so. Simply put, those with higher credit scores generally receive more favorable credit terms.
Your Financial Report Card
A credit score is a statistical summary of the information contained in a consumer’s credit report usually graded on a scale ranging from 300 to 850. Your score represents your financial reputation. It is used by lenders, landlords, employers and others to determine your level of credit risk, responsibility, and overall character.
Credit scores are calculated using information in your credit reports, including your payment history, the amount of debt you have, and the length of your credit history. Higher scores mean you have demonstrated responsible credit behavior in the past, which may make potential lenders and creditors more confident when evaluating a request for credit, like a loan or a credit card.
Here is a general look at credit score ranges:
- Excellent – 800-850
- Very good – 740-799
- Good – 670-739
- Fair – 580-669
- Poor – 300-579
Credit scores may vary according to the scoring model used and which credit bureau furnishes the credit report used for the data. That is because not all creditors report to all three three nationwide credit bureaus (Equifax, Experian and TransUnion). Some may report to only two, one or none at all. Also, lenders may also use a blended credit score from the three major credit bureaus.
The types of credit scores used by lenders and creditors may vary based on their industry. For example, an auto lender might use a credit score that places more emphasis on your payment history when it comes to auto loans.
Since everyone’s financial and credit situation is different, lenders may also have different criteria when it comes to granting credit, for example, including your income as a factor.
What Affects A Credit Score?
Credit scores are based on the information in our major credit reports. They represent a numerical weighting of different categories found in a credit report. There are two major providers of credit score reports in the US: FICO Score and VantageScore. While the credit scores may be calculated a bit differently, they will likely produce very similar results for you.
Your credit score is calculated only from the information in your credit report. However, lenders may look at many things when making a credit decision, such as your income, how long you have worked at your present job, and the kind of credit you are requesting.
Credit Score Categories
If you have good marks in each of the following credit categories (using FICO Score as reference), your credit should be good no matter which credit score report is used. These percentages are based on the importance of the five categories for the general population. The importance of these categories may vary from one person to another.
Payment history is the most important part of any credit score. The first thing any lender wants to know is whether you have paid past credit accounts on time. This helps a lender figure out the amount of risk it will take on when extending credit.
Having credit accounts and owing money on them is the second most important category of a credit score. It is an indicator of whether your spending habits are sustainable and if you are likely to face serious financial problems in the future. If you are using a lot of your available credit, this may indicate that you are overextended-and banks can interpret this to mean that you are at a higher risk of defaulting.
In general, a longer credit history will increase your credit report. The length of time using loans, credit cards and lines of credit is important in accurately forecastig a borrower’s future risk behavior. However, even people who haven’t been using credit long may have credit scores depending on how the rest of their credit report looks.
This category measures your mix of different types of credit accounts (credit cards, retail accounts, installment accounts, auto and mortgage loans) and how recently you have used them. The types of credit you have used shows how experienced a borrower you are. It is not necessary to have one of each.
On a credit score, this category emphasizes your recent financial performance. This is one of the best predictors of your future financial activities. Research shows that opening several credit accounts in a short period of time represents a greater risk, particularly for people who do not have a long credit history. If you can avoid it, try not to open too many accounts too rapidly.
Tips To Improve
The process to improve your credit score is a combination of fixing your credit reports (if needed) of any disputable negative items and changing your financial behavior to better manage your credit and debt accounts. This process takes patience, discipline and time. Here are specific areas that you should focus on:
- Improving your credit accounts payment history.
- Reducing the amount of debt that you owe.
- Minimizing the opening of new credit accounts.
Improving your consumer credit score is like losing weight. If your score is good to excellent, you will simply focus on maintaining your positive financial behavior. Otherwise, to improve your credit score, you will need to make changes in your financial life. It is really that simple.
Similar to a crash weight diet, quick fix efforts to improve your credit score will likely not produce the results that you desire. It simply takes time to manage credit responsibly.
If you haven’t used credit well in the past, you should review your credit reports to determine whether you need to repair your credit history before you see credit score improvements. The quality of the data the credit bureaus collect is used to calculate your credit score. Good credit data in, good credit score out, with time.
An overview of consumer credit score is presented. This includes 1) Importance Of Your Credit Score; 2) What Is A Credit Score; 3) Details About A Credit Score; 4) What Affects A Credit Score; and 5) What You Can Do To Improve Your Credit Score.
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