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Every time you get a loan for personal, auto, or business needs, a mortgage for your house, or even a credit card, your credit score is checked. Be it with your bank or any financing institution or credit card company, your credit score influences whether you can successfully secure financing, how much the limit would be, and the terms and interest rate to be applied to it. Some insurance agencies check your credit score to determine the insurance premium you need to pay, as well as your likelihood of filing insurance claims. There are even instances that prospective employers check on your credit score to see if you can be hired.
Not all credit scores remain the same, though, as they are generated using a borrower’s updated data. Read on to see what a credit score is all about and what you can do to improve it.
Just the Nuggets
- A credit score helps lending agencies determine the creditworthiness of a person.
- Your credit score is dynamic since updated data is used to determine it.
- There are mainly two credit score models in use today: FICO and VantageScore.
- Factors affecting your credit score include payment history, credit history and utilization, new credit, and credit types availed.
- You can improve your credit score by making regular loan payments on time and minimizing your credit card balances, among other ways.
- Periodically checking your credit score is a must so you can monitor and make necessary corrections when needed.
Credit Score Defined
Credit score, otherwise known as credit rating, is a number or score between 300 and 850 showing how likely you are to pay back the loan or credit you have secured. It also shows how a person behaves in comparison with other borrowers. A higher credit score increases the chances of your loan application being approved with better interest rates than others.
Credit Scoring Models
Equifax, TransUnion, and Experian—the three primary credit bureaus—are companies that collect and process data on credit usage and generate credit reports for lending and financing institutions, banks, credit card issuers, insurance, and other similar agencies. You can also request a copy of your credit report from one or even all of these credit bureaus. Furthermore, you can secure a copy from the lender if your application for credit has been denied within a 60-day timeframe after such denial.
These credit bureaus use two scoring models—FICO and VantageScore. A risk management tool used by financial institutions like banks, a credit scoring model estimates the possibility of someone defaulting on payments for an approved credit or loan. The model uses historical data in calculating the creditworthiness of a person. However, not much variance in your credit score is expected when comparing your results from one scoring model over another.
FICO is the most recognized and used credit scoring model. It stands for Fair Isaac Corporation, a company that offers analytics software for both the business and consumer sectors. Their software runs a large volume of data through mathematical algorithms allowing the users (bank, lending company, credit card issuer, auto dealership, etc.) to predict how a consumer behaves. Thus, risks are managed and fraud is avoided. In turn, operations are optimized and customer relationships become more profitable. Also, the use of their software complies with all government rules and policies.
FICO® Score is one of the company’s software offerings. This scoring model is used by 90% of the major lending agencies in calculating a person’s credit score.
FICO® Score Versions and Their Uses
FICO Scores are regularly updated to meet the current requirements for credit usage. We all know that how we use credit now is considerably different from how our parents or grandparents used it 30 or 40 years ago.
There are also new FICO Score versions developed to meet specific industry applications like credit card issuing and vehicle lending agencies. These industries consider other factors in assessing a person’s creditworthiness.
The following are the commonly used FICO® Score versions and their uses:
- FICO Score 8 (mostly used by 90% of the primary financing and lending institutions)
- FICO Score 3 (used by credit card issuers)
- FICO Bankcard Scores 2, 4, 5, and 8 (variations of the FICO Score developed in response to credit card customers’ requests for a score that closely addresses their requirements; optimizes the weight for credit card history over the base score)
- FICO Auto Scores 2, 4, 5, and 8 (used by auto or vehicle lending purposes)
- FICO Scores 2, 4, 5, and 8 (used by mortgage lending agencies)
New FICO Score versions were recently released, but they’re not as widely used as the above versions. These are FICO Score 9 and 10, FICO Bankcard Score 9, and FICO Auto Score 9.
How FICO Works
FICO® Score considers the following factors in determining your credit-worthiness.
- Payment history
It considers your payments on your past credit, whether they were on time or delayed.
- Amounts owed
It determines your utilization rate by comparing your total loan and credit use via your credit limit.
- Credit history length
This looks into how long you’ve had your credit and loans.
- New credit
This considers the number of times you’ve applied for new credit, as well as the new accounts you’ve opened.
- Credit mix
This factor takes into consideration the different credit products you currently own. This may include credit cards, mortgage, installment loans, financing and lending company accounts, among others.
FICO Score Ranges
|FICO SCORE RANGE||RATING||DESCRIPTION|
|<580||Poor||This indicates that you may be a risky borrower. It is a score that falls way below that of the average US consumer.|
|580 – 669||Fair||This score may let the loan company approve your application despite it being below the US consumers’ average score.|
|670 – 739||Good||This score makes the majority of the lenders approve your loan application. It means that your score is almost the same or a bit higher than those of the average consumers.|
|740 – 799||Very Good||This indicates that you are a dependable and credible borrower. It is also a score above the average consumers.|
|800 or more||Exceptional||This shows that you are a remarkable borrower. It is well above that of the US consumers.|
VantageScore was jointly developed by the three primary credit bureaus—Experian, Equifax, and TransUnion. As with FICO, it also uses a consumer’s statistics to determine the non-payment of a loan. Its latest version is VantageScore 3.0.
How VantageScore Works
VantageScore uses terms to describe the level of influence a factor has on a person’s creditworthiness.
It considers the following factors in determining your creditworthiness.
- Payment history (Extremely Influential)
On time or delayed payments are considered as a major predictor of the risk of extending credit to the consumer.
- Depth of credit (Highly Influential)
This considers your accounts as well as the length of your history where credit is concerned—whether you held several accounts, and if payments are made late or on schedule.
- Credit utilization (Moderately Influential)
This factor takes into consideration the ratio of your balances against your available credit. It is computed by dividing the balances with the credit.
- Balances (Moderately Influential)
Total balances consider the sum of all your debts, both delinquent and current.
- Recent credit applications (Less Influential)
This factor takes into consideration the new accounts you’ve opened, as well as the hard inquiries made on your accounts.
- Available credit (Less Influential)
This is the amount or value of credit available for you to use.
VantageScore also keeps the 300 to 850 score range as FICO. For you to get better credit terms, your score should be in the higher range or as close to 850 as possible.
Check Your Credit Report
What you can do to check your credit score is by requesting a copy of your credit report. You can get one from the three primary credit bureaus—Equifax, Experian, and TransUnion. If you decide to get a report every three or four months, for example, you will have to pay a fee that is not more than $12.50 each time.
However, US federal law requires these bureaus to provide a free annual report upon request. This report, though, will not include your credit score but will include your identifying information, credit account data, inquiry information (by yourself, credit card companies, insurance firms, loan servicer), and the like. It also includes bankruptcies and collections accounts (including past-due ones). All these data will give you an idea of how you might score in any of these scoring models.
Some websites offer free credit reports. Just be cautious and check if you do not have to pay for other services or products they offer before you can avail of a free report. Also, make sure you’ll not be billed for services you have to cancel later just for you to get a free report.
The following sites provide a free credit report:
Also, some companies can give you a credit report depending on its intended use (industry-specific). Some of them can provide you with a free credit report while others do so for a fee.
Remember, your credit score will not be affected if you request a copy of your credit report.
What is a Good Credit Score
A score of 700 or more is considered relatively low risk.
Scores that fall below the 600-mark indicate some or a greater degree of risk.
Low scores (Poor or Fair) may lead to a denial of your credit application. In instances that your application is approved despite your low credit score, a higher interest rate, shorter repayment period, or both may be applied.
How to Improve and Maintain a Good Credit Score
If you have no credit history
1. Establish credit as soon as possible
The easiest is to become an authorized user of a credit card of a family member or trusted friend with good credit.
2. Aim for a mix of different credit types
This can include revolving debts (credit cards) and installment loans (appliance or auto loans, etc.).
3. Apply for a credit card yourself
A secured credit card is the best one to apply for, as it requires a minimum security deposit which is also your credit limit.
4. Use credit-building tools or loans
These are tools like the Experian Boost, as well as the offerings by credit unions, financial institutions like community banks, and companies like Self and Kikoff. They can be used to pay your cell phone and utility bills and to establish credit.
5. Do not apply for different credit accounts at almost the same time
It is best to space the applications by at least six months as doing the opposite can harm your credit score.
6. Do not exceed 30% of your limit
Once you have established your credit, maintain credit utilization below this level.
7. Make timely payments
Pay your bills on time, at the minimum amount due or more if you can.
8. Maintain your credit card accounts and keep them open
Closing a credit card account affects your utilization rate as well as the average age of your credit account.
9. Be cautious when co-signing a loan
Remember, you will have to be responsible in case the principal borrower defaults on the payments, which in turn can be included in your credit report.
If you have bad credit
To bolster your credit score, you can take the following actions:
1. Start paying your loans and bills on time
Doing so can improve your credit history, which impacts your credit score tremendously.
2. Deal with and settle delinquencies
Resolve delinquencies as soon as you can to improve your payment history.
3. Decrease your credit utilization
This means you should use only 30% or less of your credit limit. You can then aim to whittle it down gradually to 10% or lower.
4. Do not max out your credit cards
Aim for 25% of your credit limit or lower to make payments more manageable.
5. Do not simultaneously open new loan and credit card applications
Many hard inquiries will result in a lower credit score.
6. Monitor your credit progress
Track and assess your credit score regularly, especially when you have already started settling your delinquencies and new accounts. You can use credit monitoring services for this like Identity Force, Credit Karma, and Privacy Guard.
Credit Score Myths
There are some misconceptions regarding the three-digit number you should know of to separate the myth from the truth.
“There is only one credit score for you.”
Truth: You can have more than one credit score. Aside from FICO and VantageScore credit scores used by the three major credit bureaus, there are also other credit scoring models used like CreditXpert Credit Score, Insurance Score, as well as industry-specific ones. Depending on the score’s intended use, different weights may be assigned to almost the same factors used by FICO and VantageScore.
“You get a lower credit score if you check on it.”
Truth: Checking your credit score is considered a soft inquiry and will not impact your new credit or recent credit applications rating.
Conversely, queries by lending agencies, credit card companies, and the like are considered hard inquiries and can affect your credit score.
“Your credit score is affected by your personal information.”
Truth: Your credit report only includes your name, address (current and previous), birthdate, Social Security number, and other public information like bankruptcies and liens. It does not include data like gender, education, marital status, political affiliation, income, or religion (all of which are prohibited by Federal law).
“You are wealthy if you have a good credit score.”
Truth: Your credit score provides a way to measure your creditworthiness. A good credit score means the risk of you defaulting on your payments is considerably lower compared to others with a fair or poor score.
“My credit score won’t be affected by my student loan.”
Truth: All your bills and loans will affect your credit score. This will affect your payment history, amounts owed or balances, and credit history length.
Credit Score Terminology
|Bankruptcy||a process of legally releasing a person from paying owed debts. This is normally included in credit reports for 10 years at most.|
|Credit Bureau||a clearinghouse for information on the credit performance or rating of persons or entities|
|Credit History||a summary of a consumer’s credit obligations and his repayment record (late and timely), bankruptcies filed, liens and encumbrances, and inquiries made by expected lenders|
|Credit Report||a report on the credit standing of a consumer generated by a credit reporting bureau or agency|
|Credit Risk||the possibility that a person will not pay the credit obligations per agreement.|
|Credit Score||also called credit bureau risk score; a score derived by processing a consumer’s data using statistical models. It provides a picture of his credit risk at any given time and the likelihood that debts will be repaid per agreement|
|Creditor||a lender (person, organization, or company) from whom a debtor borrowed and is financially indebted to|
|Delinquency||failure and inability to pay the debts on time. Creditors usually have monthly cycles and report accounts as 30-, 60-, 90-, and 120-days delinquent.|
Although credit scores are used in determining whether you can get a loan, rent an apartment, buy a house, acquire a car, get employed, and a whole lot more, you can work on having a good credit score, if not an exceptional one. Whether you are just establishing your credit standing or repairing it, there are a lot of ways for you to do so.
Remember, your credit score is generated using current and updated data. Therefore, your credit score is not permanent and can be changed positively. With the right mindset and stricter credit management, your credit score will definitely improve.
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