Everybody wants excellent credit. It is one of the most coveted things in the world, and many people strive for it.
Life is easier when you have a good credit score, as it opens many doors, such as lower loan interest rates, lower insurance premiums, and even better job opportunities.
But when something happens, and you find yourself with a poor credit score, it will weigh heavily on your mind about how to get your good credit score back!
What is a credit Score?
A credit score is a number used by lenders to determine a borrower’s creditworthiness. It shows the borrower’s credit utilization, payment history, and other details. A high credit score may result in lower borrowing costs, whereas a low credit score may result in higher fees and interest rates.
Credit scores are a vital part of people’s financial lives, so it is only normal to wonder just how is your credit score calculated.
You do have different kinds of credit scores. Some of them are VantageScore, but 90% of lenders ask for a FICO credit score when you make a credit application. And there are even different versions of FICO scores, but generally, there are five factors that make up a FICO score.
Before diving into each factor, we will begin with a clear understanding of what a credit score measures and how lenders use it.
What does a credit score measure?
Your credit score is a three-digit number that proves your creditworthiness. FICO scores vary from 300 to 800. The greater your score, the less risky you appear to lenders and creditors. You can check your credit reports in different credit monitoring services to know your score.
Take a look at where you stand in the FICO score ranges:
- Exceptional: 800-850
- Very good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: 300-579
When you apply for a credit card, the lender will ask for your credit score.
Your score, card application, and credit report help the issuer decide if you are eligible for a credit card or not.
It is essential to understand your credit range so that you do not apply for credit cards that are unlikely to be approved.
For example, a credit score of 700 indicates a good score.
How is your credit score calculated and determined?
FICO, previously known as Fair Isaac Corporation, makes your credit score, also called the FICO score.
FICO is not the only kind of credit score you can get. However, it is among the most used measurements by lenders to evaluate the risk involved in doing business with a borrower.
A credit score is calculated using an algorithm that uses the data in your credit report from one of the three major credit reporting agencies.
In addition, lenders and/or creditors are not always required to report to the three major credit reporting agencies. That is why your score can differ from one bureau to another.
But your credit score is always calculated or composed with these five factors:
- Payment history: 35%
- The amount owed: 30%
- Length of credit history: 15%
- Credit mix: 10%
- New credit: 10%
Payment history
Payment history accounts for 35% of your score. It shows whether or not you make payments on time, how frequently you miss payments, and how far past the due date you have paid.
A 30-day-late payment will be reported by your lender and affect your credit score.
The number of accounts that have late payments, how far behind you are on your bill payments, and whether you have brought the credit accounts up to date in all aspects.
Amount owed
How much you owe on credit cards and loans is 30% of your score. It depends on how much you owe, how many accounts you have, and how much credit you have compared to what you owe.
A high balance and maxed-out credit cards can lower your score. A lower credit balance, on the other hand, can raise your credit score if you make timely payments.
New loans with poor payment history can lower your score for a short period. Although, nearly-paid-off loans may raise it because they indicate a good payment history.
Length of credit history
The extent of your credit history makes up 15% of your credit score. The longer you have a track record of making on-time payments, the higher your credit score will be.
Credit scoring models usually focus on the average age of your credit when factoring in credit history.
That is why you should think about keeping your account open and active.
Credit mix
The types of accounts you have contributed 10% to your score; having a mix of accounts, such as installment loans, home loans, retail, and credit cards, can help improve your overall credit score.
New credit
Your recent credit activity makes up the remaining 10% of your score. Multiple new account openings or applications may signal financial difficulties and reduce your score.
However, credit scoring models recognize that borrowers are not always risky.
Takeaways
Ultimately, using credit cards and loans properly and paying them on time can help in boosting credit scores.
Lenders will offer you a better rate if your credit history shows you can manage your credit responsibly.
Your credit score is an important instrument that lending agencies use. It is crucial to keep an eye on your credit report and its components.
Improving your credit score is essential for both your own financial security and your ability to obtain better terms on loans and other products. Additionally, getting approved for insurance or a mortgage may be simpler if you have a good credit score.
Regularly review your credit report and take immediate action to correct any errors. If your credit score is poor and you need help removing negative marks, credit repair businesses can help.
Finally, remember that credit scores are based on several factors, so do not let one problem prevent you from obtaining the credit you need.
