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Your eligibility to get a loan in the current financial market, with its numerous financial opportunities, depends about 99% on your credit report.

What Is A Credit Score?

The credit score is a number that represents your capability of managing your finances and timely (or lack thereof) bill payment.  It is based on your credit history. This number helps lenders to decide whether an individual meets their criteria to receive a loan or not. It also helps them to identify the risk that may be involved in lending the money or extending credit.

How Is A Credit Score Derived?

Credit score data is directly related to your pattern of bill payment, number of accounts or outstanding debt.  It is used to reach a number, with the help of a statistical program. This number is known as the credit score. If you have a high score, then chances are, you will get qualify for loans or credit cards with low interest rates.

The most common method used to calculate the credit score is known as FICO. This method originated from an independent company called Fair Isaac and Company. They came up with the software and scoring method that is used by lenders, banks and insurers. The three major credit bureaus- Experian, Equifax and TransUnion – worked with this company in the 1980s to create a scoring method. Today each bureau has its own FICO score version based on the original FICO scoring method. Equifax has Beacon, Experian has the Fair Isaac system and TransUnion has the Empirica system. They provide three different credit scores.

How Credit Scores Are Determined?

Generally, credit scores range from 300 to 900. The factors that determine your credit score are:

• Payment History: Your payment history contributes nearly 35% of your credit score. If you paid late bills or have filed bankruptcy, then this will negatively affect your credit score, causing the number to go down.
• Outstanding Debt: 30% of your credit score is based on the number and type of outstanding debts you have.  The amount you owe on loans and the number of credit cards you have within your credit limits also affect the score.
• The length of time for which you have had the credit makes up 15% of your credit score.
• Types Of Credit: The number of loans you have used matter a lot in calculating your credit score. This makes up about 10% of the score.
• Credit Report Inquiries: The inquiries carried out on your credit report make up the remaining 10 % of the credit score.
• Any increase in the credit score decreases your credit risk factor. An average credit score of 680 is sufficient to obtain low interest loans fairly easily. It is important to have a good credit rating from all the three credit report agencies.

How To Improve Your Credit Score

Credit scores keep changing with every small change in the credit report. Keep reviewing your report to check for errors. Maintain your old accounts. Creditors take a look at the average age of the accounts as well. Pay your bills on time. Be alert and attentive to every detail on the credit report and rectify any errors as soon as they arise.

Get your credit score free by enrolling in our 7 day free credit monitoring trial.

 

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