When it comes to investing, getting a loan and staying in good financial health – one number we all know matters, is our credit score. But what counts towards this little number that can determine whether or not you can afford your dream home, what your credit limit on your new card is likely to be, and so much more? To better understand how to improve credit scores or before you even understand how to check credit scores, you would do well to understand how this score is determined by banks and credit card companies.
Credit scores: Who decides?
Credit scores are determined by various credit rating agencies. The most widely accepted and used one on American shores is the one issued by FICO or the Fair Isaac Corp. While there different varieties of scores, each with its own particular set of parameters there are some broad areas that remain constant across the board.
Understanding the credit score range
Credit scores are usually assigned in a fixed range. Typically, a good credit score is anything over 600, with 750 plus being especially good. The credit score range from FICO, also called the FICO score range, lies between 300 and 850. Once you know how to check credit scores, if you find yourself with a number below 550, it is time to take action. Read up on how to raise your credit score and start making changes immediately.
All credit scores consider the data in your credit report, most important of which, is your payment history. The report will carry details of how prompt you have been with repaying credit card bills, loans and other debt. In case you have had debt that was lined up for collection or was flagged for bankruptcy or referred for foreclosure, this will also show up. How old these cases are will impact the extent to which they affect your credit score.
About a third of weightage is given to the amounts owed. Credit owed or the amount of credit utilization you have shows whether you have ‘maxed out’ your limits and are possibly over leveraged, or are at healthy levels of usage. Remember, just because you have a higher quantum of outstanding debt does not mean you will be labelled a high risk borrower.
Duration of credit history
Having a longer credit footprint or history is nearly as important as having a good one. If you have no history to speak of, the lender doesn’t have much to go by and a credit score like FICO cannot make as accurate a prediction of future behavior. This is also has implications on the weightage of other factors, which will change to accommodate the absence of credit history.
The kind of debt or borrowings you have is also factored into arriving at your credit score. The score considers the composition of all your financial products – including retail accounts, finance company accounts, credit cards, installment loans and mortgage loans.
As part of the checks, the duration for which you have held your accounts is also taken into consideration. If someone has opened up a lot of new credit accounts recently in a very short span of time, in the near past, it can have a detrimental impact and reduce your chances of getting a good credit score. This is especially true of someone with a limited credit history overall.
Bill payment history
Credit scores aren’t just about reviewing your payments on loans and cards. Often, one of the big areas of regular expenditure are our utility bills. And that’s why this forms an important addition to the credit score calculation. Late payments and defaults on monthly bills show up on your history and chop a fair number of points off your score.
Now that you are aware of how this number is calculated, you will be better equipped to work towards getting a good credit score.