It is very important to understand credits score. They meant to develop a snapshot of the risk you currently represent to a lender. There are several parameters such as length of credit history, loans, mortgages, public records, number of open accounts etc and on this basis, a three-digit score between about 300 and 950 has arrived. This credit score affects what types of loans we can get, can influence our ability to get an apartment or house, and they can even be a factor in our job hunt. Usually, a lender will use a combination of your scores with other factors when they have to determine your risk.
Credits score places the borrower in one of three main categories which are as follows:-
Prime: If your credits score is above 680 then you are considered a “prime borrower”. Then you have no problem in getting a good interest rate on your home loan, car loan, or credit card.
Sub-Prime: If your credit score is below 680, you are “subprime”. Then you will likely pay a much higher interest rate on your home loan, car loan or credit card.
Shafted: Below 560 is the shafted score. In this category, most lenders and credit issuers perceive it. Maybe you can still get a credit card but you will likely be hit with a high acquisition fee or with security deposit. In addition to that, your interest rate will be very high such as 22 to 23%. A very low score can lead to complications in getting credits or even getting the job.
Credits Score Calculation
There are various scoring models but FICO and the Vantage are the common scoring model. Still, FICO is still the leader in credit scoring.
Here how FICO score ranges:
- 800 to 850: Exceptional (19.9% of all people)
- 740 to 799: Very good (18.2%)
- 670 to 739: Good (21.5%)
- 580 to 669: Fair (20.2%)
- 300 to 579: Very poor (17%)
Factors Affecting the Credit Scores
There are main five factors which affect the credits score which is as follows:-
- Payment history
- Amounts owed
- Length of credit history
- New credit
- Types of credit used
For further details regarding this, refer: credit score calculation
Improving Your Credits Score
Well to have a good credit score, it needs time and efforts. Having good credit score helps you to get loans easily and with good interest rates. It doesn’t mean that you have to spend hours to improve it. Here are some tips to improve your credit score which are as follows:-
- Pay your bills on time. Sounds simple, but it will help you a lot to keep your score high. Delinquent payments and collections are one which gives the major negative impact on your credit score.
- Keep your balances low on unsecured revolving debt like credit cards. High outstanding balances can affect your credit score.
- The amount of your unused credit is an important factor in calculating your score. You should only apply for credit that you need.
- Make sure the information in your credit report is correct. If it’s not, dispute it with the credits agencies and/or with the creditor directly.
- Removing negative items in your credits report has the biggest impact on your FICO score. Generally, negative items stay on your reports for seven years but you can hire a professional credit report repair service to do it for you.