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Credit scores determine your creditworthiness. It is the primary criteria that influences the decision of lenders to provide credit to people applying for various kinds of loans.

A credit score is typically a three-digit number that is calculated to determine your ability to pay back money that is lent to you. It is essential to have a good credit score, as your application for a mortgage, car loan or even insurance (yes, insurance!) will be approved or denied on that basis. Keeping a high credit score will make you capable of getting credit on favorable terms. There are several factors that have an impact on your credit score:

• Payment Of Bills: You can never get a good credit score if you are paying your bills late.  A late bill payment record indicates to lending institutions that you are liable to repeat the same in the future, with them. Therefore, you should try to pay the due amount on your bills on time in order to ensure a healthy credit score.
• History Of Your Credit: A credit score will be attached to your profile only if you have a credit history. In other words, in order to have a credit score, whether high or low, you must first have a credit record and must have borrowed money from a lending institution at some point.
• Bankruptcy: If you have declared bankruptcy in the past, it can result in a negative credit rating for a very long time.  Although not the bad omen that it once was, it will still take some time and effort to shake that off your record.
• Debt: If you have a lot of debt, it can seriously hurt your credit score, as it will give lenders pause regarding your ability to repay. Therefore, you should try to keep your debt ratio low.
• Frequency Of Inquiries: Repeated attempts to open new lines of credit or applying for credit cards, in a short period of time (especially if not approved) can definitely hurt your credit score.  Apply for credit sparingly and only when necessary.

How Is It Calculated?

Until fairly recently, credit scoring was a closely guarded “industry secret” (remember when we said credit reporting agencies don’t work for you?). Credit scoring was not revealed to customers until 2001, when Congress passed legislation making it possible for every person to view their credit scores. A statistical model is used to calculate your credit score. This score is based on the FICO credit scoring model – a proprietary system developed by Fair, Isaac and Company. FICO is the most well known credit scoring system, although there are many other check approval services that calculate scores on the basis of the pattern used to write checks.

FICO makes use of credit reports to determine your score. The information in your report is compared to the information pattern of other credit reports. You may have more than one FICO credit score because there are three major agencies dealing in credit reporting, each following different methods to collect and calculate information. To make matters even more confusing, your credit report keeps changing every time there is a change in your credit report.

How To Check Your Credit Score:

It is important to check your credit score regularly! If you are planning to purchase something expensive and are looking for a loan to fund it, you should check your score six months before the purchase, because disputing erroneous entries and having them removed or corrected can take quite a bit of time.  You can get your credit score through several online services like MyFico.com.  The three major credit-reporting agencies also provide credit scores for a fee.

How To Improve Your Credit Score

You can improve your credit score by:

• Paying bills on a timely basis.
• Clearing all your debts.
• Maintaining a clean credit history, free of delinquent payments and collection accounts

Even though it may be somewhat confusing, you have to make an effort to understand the intricacies involved in calculating credit scores – doing so can be very helpful in making smart credit decisions and also help bring about overall improvement in your financial situation.

 

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