Of all the numbers that dominate our lives, none may be more important than a credit score. A credit score is a three-digit numerical representation of a person’s creditworthiness, which lenders use to determine how likely a person is to default on or pay off a loan or debt. The majority of credit scores range between 300 and 900, but for favorable credit consideration, a person needs a score of 720 or higher.
Why is a credit score used?
Lenders use a credit score to evaluate a loan amount or credit limit for an individual. Banks base a loan’s amount and interest rate on the applicant’s credit score, which means a poor credit score can lead to high interest rates on a low principal loan. A poor credit score can also disqualify a person’s loan application if a bank or company deems the individual to be a risk. Sites such as http://www.three-credit-report.com can get your free credit score so you can see what your score is.
Some financial institutions and credit card companies impose credit score limits, while others cater to individuals with lower credit scores. It is important to discuss these options before an institution conducts a credit check as each check can negatively affect a credit rating.
Banks are not alone in running credit checks. Landlords, government agencies, credit card companies, quick loan services, insurance companies and even cell phone companies may check an individual’s credit score before conducting business. You should always ask if a credit check is required, and only agree to one if it is absolutely necessary.
Who decides a credit score?
There are three major credit bureaus to which most lenders report. Experian, TransUnion, and Equifax each determine a credit score individually. So, one person may have three scores – one score from each credit bureau. Mortgage lenders also depend on FICO to find out a person’s credit score.
While there could be a definitive formula to calculate a credit score, these formulas are not public. But there are known factors that help determine a credit score. A person must have some form of credit to determine creditworthiness. This may seem to go against what most people think, but having too few credit cards means FICO and the credit bureaus may not have enough information to compile a true representation of a person’s creditworthiness. Without proper credit representation, a person is seen as a credit risk.
Credit score factors include:
- The amount of debt. Large amounts of money owed on loans and credit cards have adverse effects on credit scores. That is why is it recommended to pay off any debt as soon as possible and keep loan amounts as low as possible.
- How long debt lasts. The length of time it takes to repay a loan or pay off the balance of a credit card affects a credit score.
- Your payment history. Making payments on time can help your credit score, just as missing payments may hurt the rating.
- Any new credit. Each time you apply for new credit (such as a new credit card or a loan), a credit score check is conducted. These credit requests are recorded, and multiple credit checks in a short amount of time can be considered risky.
- The types of credit you use. Bank loans, bank credit cards, in-store credit cards and payday advances are all different types of credit used. The more types you use, the riskier you seem.
Talk to a financial adviser or your lending institution to discuss ways of managing your credit score.