Your credit score is an essential tool that can help you determine how much you can borrow, whether or not you’ll have to pay extra for insurance, and even whether or not you qualify for a loan. It tells lenders when they can trust your repayments and prevents them from making a wrong decision relying on your word alone.
As such, there are many reasons why it’s essential to know your credit score. While your credit score is a vital part of your financial life, it’s necessary to understand that several different types of credit scores exist. This guide will help you learn what makes up a credit score, how lenders evaluate and use it, and how you can take steps to improve your situation.
What Is a Credit Score?
A credit score reports the information used to determine how likely you are to repay a loan. It will show any outstanding debts you may have, whether or not you’ve paid any bills on time and you’ve been sued for failing to pay a debt.
Your credit score will also indicate your overall financial position. This includes your income, assets, and the amount of debt that you have. Because your credit score is based on your long-term credit history, it will generally be found in the past seven years.
What makes up a credit score:
Your credit score is typically made up of three different factors. The first factor is your payment history, comprised of the number of times you’ve paid your bills on time.
The second factor is the length of time that you have been in debt. This will be based on the date you last paid off a debt, but it will also include any overdue payments you’ve missed over the past seven years (if they aren’t paid within 30 days, they won’t be included).
The third factor is your credit utilization ratio. Your credit utilization ratio measures how much of your available credit you use every month. It will be determined by the debt amount and the constant payment percentage (the money you owe to pay off a debt).
How lenders evaluate and use credit scores:
Credit scoring is a fact of life for many low-credit individuals. It handles two factors important to lenders when deciding your ability to repay a loan. These factors are your payment history and the amount of debt versus your available credit.
The lender will look at both of these factors but weigh them differently according to their own standards. The higher the factor, the more critical it will be in determining your loan approval or denial.
Your payment history will be weighed more heavily by most lenders. The general rule of thumb is that a borrower with a credit score between 600-700 will generally have a good payment history, while those with a score between 400-599 will have past-due payments.
While creditors are most concerned with your payment history and the amount of debt you currently owe, they will begin to take into consideration your ability to pay as well.
How to improve your credit score:
If you want a better credit score, several tactics can help you improve it.
One of the easiest and most effective ways to improve your credit score is to use a secured credit card. Using a secured card will improve your payment history by allowing you to draw money from another account to make your payments.
You should also pay all of the debts that you have in full each month. If you have any outstanding bills, make sure you make timely payments and pay them off as they are due.
If you have an outstanding balance on your credit card, you’ll want to pay it off as soon as possible. Be careful not to take on too much debt or use your cards for unnecessary expenses.
Finally, be sure that your debt isn’t causing you any problems. If a creditor is collecting late fees or penalties for defaulted payments, ensure you’re paying these off as quickly as possible.
Filing for bankruptcy can make your credit score more challenging to improve. If you decide to file for bankruptcy, make sure it is the right option for your particular financial situation. If possible, negotiating with creditors or making alternative arrangements is usually better.
Avoiding bankruptcy is your best option when it comes to your credit score. Most creditors will look at any recent bankruptcies as a sign of risk, even if they occurred several years ago. If possible, you should avoid bankruptcy or consider a different credit card with a lower APR.
What types of information make up a credit score:
Four main types of information will go into your credit score. These include data from public records, public databases, the collections department, and third-party companies.
Public records: Your credit score will get its first impression of you based on what is in the public records. State and federal governments run these to keep track of lawsuits and tax liens. This includes things like foreclosure notices or court records.
Public databases: Many lenders use general information databases to gather their information. These include things like public records, bankruptcy records, and delinquent debt information.
Collection agencies: If you have unpaid credit card bills, you may be contacted by a collection agency with a financial interest in getting your money. These companies will typically send you letters threatening fines and interest charges unless you pay off the debt immediately. They’ll also sometimes leave messages on your telephone answering machine threatening to take legal action if you don’t pay them immediately.
Finally, you can also check your credit score from third-party sources. These include companies like TransUnion and Equifax. These companies will often post your credit scores for free on their websites. However, their scores typically aren’t as accurate as a lender’s, based on their lending history with you.
How to get a free credit report:
Credit reports are a critical part of your financial health. Having a copy of your credit report on hand can help you review your economic history, keep track of any problems that you may have with creditors or debt collectors, and even help you find new lenders.
Many places offer free copies of your credit report. These include the three major credit bureaus, the National Consumer Agency in the UK and other government agencies, and many public libraries across the country.
If you’re concerned about privacy or want to check just a few of your credit accounts, you can request your free report online. You can also download your information and pay a small fee rather than asking for a hard copy.
Free credit reports are handy, but they cannot give accurate information on your score. These reports may help verify your score’s accuracy, but it’s best not to rely on them exclusively.