What is a credit score?
A credit score is a number between 300 and 850 that represents the solvency of a consumer. The higher the score, the better the borrower will consider potential lenders. A credit score is based on your credit history: the number of accounts opened, total debt levels, payment history, and other factors. Lenders use credit scores to assess the likelihood that a person will repay their loans on time.
The credit rating model was created by Fair Isaac Corporation, also known as FICO, and is used by financial institutions. Although there are other credit scoring systems, the FICO score is by far the most widely used. There are several ways to improve a person’s score, such as paying off loans on time and keeping debt low.
How Credit Scores Work
A credit score can significantly affect your financial life. It plays a key role in a lender’s decision to offer you credit. People with credit scores below 640, for example, are generally considered high-risk borrowers. Lenders often charge interest on subprime mortgages at a higher rate than a conventional mortgage to offset the higher risk. They can also request a shorter repayment period or a co-signer for borrowers with a low credit score.
In contrast, a credit score of 700 or higher is generally considered good and can result in a borrower receiving a lower interest rate, causing them to pay less interest over the life of the loan. Scores above 800 are considered excellent. Although each lender defines its credit score ranges, the average FICO score range is often used.
A person’s credit score may also determine the amount of an initial deposit required to obtain a smartphone, cable, or utilities, or to rent an apartment. And lenders often look at borrowers’ scores, especially when deciding whether to change the interest rate or credit limit on a credit card.
Credit score factors: How your score is calculated
There are three major credit reporting agencies in the United States (Experian, Equifax, and Transunion) that report, update, and archive consumer credit histories. While there may be differences in the information collected by the three credit bureaus, there are five main factors that are assessed when calculating a credit score:
The payment history has a credit score of 35% and shows whether a person pays their obligations on time. The total amount owed represents 30% and takes into account the percentage of credit available to a person who is currently using it, known as credit use. The length of your credit history is 15%, and longer credit histories are considered less risky as there is more data to determine your payment history.
The type of credit used represents 10% of a credit score and shows whether an individual has a combination of term credit, such as auto or mortgage loans, and revolving credit, such as credit cards. New credit is also 10% and takes into account how many new accounts a person has, how many new accounts they have recently applied for, what leads to credit applications, and when the most recent account was opened.
If you have a lot of credit cards and want to close some that you don’t use, closing your credit cards can lower your score.
Instead of closing them, take unused cards. Keep them in a safe place in separate, labeled bags. Go online to log in and verify each of your cards. For each one, make sure there is no balance and that your address, email, and other contact information are correct. Also, make sure you haven’t set up automatic payment in any of them. In the section where you can receive alerts, make sure you have your email or phone address. Be sure to check them periodically for fraudulent activity, as you won’t be using them. Set a reminder to review them every six months or annually to make sure no changes have been made and nothing unusual has happened.
How to improve your credit score
When information is updated on a borrower’s credit report, their credit score changes and may increase or decrease depending on the new information. Here are some ways a consumer can improve their credit score:
Pay your bills on time: It takes six months of timely payments to see a noticeable difference in your score.
Increase your line of credit: If you have credit card accounts, call and ask about a credit increase. If your account is up to date, you must be granted an increase in your credit limit. It is important not to spend this amount to maintain a lower credit utilization rate.
Don’t close a credit card account – If you don’t use a particular credit card, it’s best to stop using it instead of closing the account. Depending on the age of the card and the credit limit, closing your account may damage your credit score. For example, suppose you have a $ 1,000 debt and a $ 5,000 credit limit divided equally between two cards. Like the bill, the credit utilization rate is 20%, which is good. However, closing one of the cards would bring the credit utilization rate to 40%, which would negatively affect the score.
Work with one of the best credit repair companies if you don’t have time to improve your credit score, credit repair companies will negotiate with your lenders and the three credit agencies for you, in exchange for a monthly fee. Also, due to the number of opportunities, a very good credit score has to offer, it may be worthwhile to use one of the best credit monitoring services to protect your information.
Your credit score is a number that can cost or save a lot of money in your life. A very good score can lower your interest rates, which means you pay less for any line of credit you take out. But it’s up to you, the borrower, to make sure your credit stays strong so you have access to as many borrowing opportunities as needed.
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