The word credit is usually nice to see and hear as far as your bank balances are concerned and most of us would love to see more of it. But being judged on a score that takes into account credit management and pattern is a different story altogether. A Credit Score does just that – it determines your creditworthiness. It is a statistical analysis of a person’s ability to pay his outstanding bills on time.
Credit score determines your creditworthiness and thereby affects your chances of getting approvals for loans, credit cards, credit limit on a credit card, mortgages, rent, high or low interest rate on a loan etc. It actually affects the savings you could achieve while taking a loan with lower interest rates, or take away your chance to rent a great apartment. Credit Score then, is really an important figure you cannot afford to ignore.
Then what determines credit score? There are about 30 such factors that affect it, the biggest factor being payment history. A few important factors you should know are listed:
1. Payment history: Information about the repayments made by you on your credit cards, mortgages, loans etc. determines how good or bad your payment history is and usually forms around 35% of your credit score.
2. Outstanding debts: The amount that you owe in each of your accounts, like loans, credit cards etc. This roughly accounts for 30%.
3. Length of credit history: If you have been availing credit facilities for a long period of time, you will be at an advantage with respect to your credit score (assuming, you have been making payments on time). This factor accounts for 15%.
4. Recent credit application: Frequent credit inquiries or credit applications can affect your credit score negatively. Frequent check of your score by lenders can also cause negative impact on your credit score. This accounts for about 10%.
5. Credit diversity and other factors: In case you have a range of credit like credit cards, mortgage, travel card etc. from a host of companies, it is good. That is because people with a range of credit get higher scores… basis the trust of so many companies. This forms 10% together with some other minor factors.
If you have maintained the above factors well enough, it may be good to know the range your credit score will fall in. According to FICO, the credit score ranges between 300 and 850. Median score is 723. However, to get a clear understanding of what indicates good or poor credit, you need to know the credit score numbers, which are as listed below:
a) Excellent: A score above 800. Seen as zero risk and offered best terms.
b) Very good or good: A score between 700 and 800. Seen as low risk. Offered good terms.
c) Reasonable: A score between 650 and 700. Seen as moderate risk. Difficult to get credit approval.
d) Bad or very bad: A score below 650. Seen as high credit risk. Tough to get new credit approval.
e) No score: If you have had no credit history or not used credit cards etc. It limits your preference for financial service providers.
For most people in US, average credit score lies between 650 and 700. Best scores stand at 800 while poorest are around 300. Paying bills on time can help you improve your credit scores.
Late payments and outstanding debts can negatively affect your credit score. To add to it, rejections on a poor credit score can further worsen your credit score as the rejection is yet another black mark on your report. Hence, pay off any outstanding on time and avoid missing payment deadlines. Bankruptcy has the biggest negative effect on your credit score. Similarly, debt settlements also have a big negative impact on your credit score.
Improving your scores is possible and very much in your control. So be prudent and punctual with bill and loan payments.