Many of us don’t know about credit scores. It is the time to buy something big or get a loan approved; we come across the word credit score. A credit score is a three-digit number used to quantify the chances of getting further debt. In this blog, we will learn more about credit scores and how they can affect our future financially.
What Is A Credit Score?
A credit score is mostly between three hundred (300) to eight fifty (850). It is calculated to know the creditworthiness of a customer. Higher the number greater the chances of getting a loan easily. A person's credit score depends on a number of things like his credit history, total existing debts, repayments and many more. Lenders look at this number to understand whether the creditor is trustworthy or not.
Fair Isaac Corporation created this credit score concept, which is now being used globally. Although other credit scoring methods exist, the score denoted by FICO is considered a standard.
How Does A Credit Score Work?
In the market, a credit score is like your credential, which can affect your financial transactions. If your credit score exceeds six forty (640), you will be considered a subprime borrower. When you try to get a loan, you have to pay much more interest than normal as creditors feel it is risky to give a loan to a subprime borrower.
On the other hand, a person with a credit score over seven hundred is considered a good borrower. He can easily receive a loan from any financial institution and need not pay any extra interest. In fact, a credit score of more than eight hundred is excellent in the market and can avail some extra benefits.
The credit score is not fixed. After a certain amount of time, it is updated. The common thinking of every person is how to increase this credit score for better opportunities.
How To Calculate A Credit Score?
Three credit agencies, namely Experian, Transunion and Equifax, who update all credit scores. They review all the financial transactions and credit histories to formulate a number. Although these three credit agencies have different standards and methods for calculating a credit score, five major factors are common for everyone. Those are-
1. Total owed amount
2. Payment history
3. Credit history
4. Types of credit
5. New credit
According to financial experts, payment history has a weightage of 35% in determining your credit score. Looking at the payment history, we can understand how the person is financial. Is he reliable or not? How much money you already owe has a weightage of 30%. Credit history is accountable for a further 15%. Types of credit and new credit account for 10% each.
A person having fair financial transactions is rated quite highly in this system. Creditors trust them easily as they have a long history of repaying loans in time. Getting new loans is quite easy for them.
Can I Improve My Credit Score?
No matter your credit score, it is always better to improve the ranking system. As we have earlier, the credit score is not a fixed number. Credit rating agencies update these scores regularly. If you want to improve your credit score, this write-up will help you. There are several ways to improve a credit rating score.
1- No matter what you purchase, pay timely. Experts say, if you pay all of your bills on time for at least a year, you will see a remarkable change in your credit scores.
2. We all use credit cards. If not, apply for one. Don’t spend all of your leverage. Try to maintain your spending limit to achieve a low credit utilization rate. This will improve your credit score significantly. Don’t fall back on your existing payments; else, you can be penalized.
3. Deactivation of an existing credit card account can cost you some credit points. If you don’t need a particular credit card, don’t use it. Don’t terminate the account. Credit utilization rate is an important factor in deciding credit score.
4. If you have an organization and desperately want to increase your company's credit score without much effort, you can hire an experienced credit score repair company. Yes, you heard it right. Professional companies are well equipped to manage all the important factors in deciding a credit score. You can try them once if necessary.
We have tried to make you understand what a credit score is and how to calculate a credit rating score? And what are the methods to improve one’s credit score? I hope this blog has helped you understand all these. A credit score is not just a number. When you go to a financial institution looking for some credit, a credit score is a thing they will look for. If your credit score is high, your loan will be approved quickly compared to a person with a low credit score.
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