What is a Credit Score and How to Improve it?

A credit score is simply a benchmark that depicts the consumer’s creditworthiness. Therefore, the better a borrower seems to potential lenders, the higher their score. The number of open accounts, total amount of debt, repayment history, and other criteria that make up credit history are used to determine a credit score. Therefore, one needs to take complete care of these factors for the betterment of their credit scores. Credit scores are used by lenders to make sure that the borrower is in the condition to repay the loan by the given time without any kind of issues.

A credit score is sometimes referred to as a number that represents your borrowing reliability. Borrowers’ credit reports are taken into account by banks and lenders when determining whether or not to approve the loan application. Therefore, you can perform a credit rating check too to know whether you have a good credit score or a bad one.

The Function Of Credit History Checks

Credit rating checks are done thoroughly by the lenders before offering a credit limit. Well, this is a very necessary procedure to be followed as it is the factor that is responsible for the approval of credit. This is because of the following functions of it –

  • Some of the factors considered in credit scoring are repayment history, types of loans, length of credit history, and an individual’s total debt.
  • Credit utilization, or the percentage of available credit currently being used, is one metric used in calculating a credit score. One needs to use the credit limit in a strategic manner as there are some criteria of such factors which affect credit scores.
  • A credit score is key in a lender’s decision to offer credit. So, credit checks are thoroughly done by the lenders.
  • It is not always advisable to close a credit account. This may have a negative impact on the credit history. Such kind of information is accessible by the lenders.

Are Credit Scores The Worthy Benchmarks?

Using credit for purchasing anything is quite common in this modern society. The credit enables us to pay our rent, purchase a house or a car, go on vacation, take care of our daily costs, and many more. But to exercise this credit limit of yours, lenders perform a credit check in order to decide whether you should get a limit or not. This is because companies must make sure you are in excellent financial standing and won’t have trouble paying them back before extending you credit. Therefore, credit scores play a very vital role in financial terms. To get the credit reports, credit history checks or credit rating checks are done.

How Do Credit Scores Work?

Credit scores are worthy benchmarks and can change the financial situation of your life. This is because of the simple reasons that it serves as a key in a lender’s decision to offer you credit.

For instance, good borrowers are often those with credit scores below 640. Because they are taking on more risk, in most cases lending institutions frequently charge higher interest rates on subprime mortgages than on standard mortgages. For borrowers with bad credit, they could also demand a co-signer or a shorter payback period. Or their request for credit may get rejected frequently.

On the other hand, a credit score of 700 or higher is generally regarded as good. It might lead to a borrower having a cheaper interest rate, which would save them money over the course of the credit they owed. Also, they may get some good credit opportunities. More than 800 is regarded as a very good credit score or one can say an excellent credit score.

A person’s credit rating may also determine the size of an initial deposit required to obtain any commodity like a smartphone, cable service, or utilities or to rent an apartment. Lenders frequently review borrowers’ scores, especially when deciding whether to change an interest rate or credit limit on a credit card.

Moreover, different credit benchmarking agencies like Experian, Illion, and Equifax have different standards for the determination of a person’s credit report. Their standards for them are as follows –

Credit RangeIlLionEquifaxExperian
Excellent800-1000833-1200800-1000
Good700-799726-832700-799
Average500-699622-725625-699
Fair300-499510-621550-624
Bad0-2990-5090-549

Credit Score Factors: Credit Score Check

Consumers’ or borrowers’ credit reports are reported, updated, and stored by three major credit reporting organizations on the basis of numerous criteria. There may be variations in the data gathered by the three credit bureaus, but there are five key elements taken into account when determining a credit score. These factors are as follows –

  • New credit
  • Payment history
  • Total amount owed
  • Types of credit
  • Length of credit history

A person’s ability to pay their debts on time or not is shown by their payment history, which accounts for 35% of a credit score and it plays a very vital role. The percentage of credit available to a person that is presently being used is known as credit utilization. This credit utilization counts for 30% of the total amount owed. Longer credit histories are thought to be less dangerous since there is more information available to establish a payment history, which accounts for 15% of the credit score.

A person’s combination of installment credit, such as vehicle loans or home loans, and revolving credit, such as credit cards, is indicated by the type of credit they utilize, which accounts for 10% of their credit score. This can also be used to increase the credit scores gradually. A person’s new credit also counts for 10%, taking into consideration the number of new accounts they have, the number of recent credit inquiries they have made when applying for new accounts, and the date the most recent account was opened.

How to Get Good Credit History?

The time it takes to improve your credit score depends on several things. It can be the number of missed repayments, how recently this happened, and the type of product you missed repayments on. It is very necessary for an individual to maintain a good credit score. When information on a borrower’s credit report is updated, their credit rate changes and can rise or fall based on new information. Improving your credit score takes time and careful management. But no need to worry as you can get your bad credit reports fixed. All you have to do is to keep the following facts in mind –

  • Pay Your Bills On Time

    one needs to pay the credit card bills, EMIs, or the loan amount on time. This not only lets your credit reports fall but also increases your credit scores gradually.

  • Up Your Credit Line

    Call and ask for a credit boost if you have credit card accounts. You should be given a higher credit limit if your account is in good standing. To keep your credit utilization rate low, it’s crucial not to spend this much money.

  • Don’t Close A Credit Card Account

    If you are not using a certain credit card, it is best to stop using it instead of closing the account. Depending on the age and credit limit of a card, it can hurt your credit score if you close the account. Just take an example that you have $2,0000 in debt and a $10,000 credit limit split evenly between two cards. As the account is, your credit utilization rate is 20%, which is good. However, closing one of the cards would put your credit utilization rate at 40%, negatively affecting your score. Therefore, avoid it.

  • Avoid Negative Entries On Credit Report

    Having negative entries on the credit reports is not good at all, These negative entries can be of any type. It may be the false information attached to it or may be your default. But all of such stuff must be reported and fixed.

  • Reliable Payments

    Making reliable payments is the best option to upline your credit limits.

  • Work With Best Credit Repair Companies

    It is always better o get help from experts. In case you have a bad credit score and you’re willing to fix it, ask for help from credit repair companies. These companies greatly assist in contriving the credit limits. They help you in proper management of credit reports, negotiate with the lenders on your behalf, etc. Additionally, given the number of opportunities a great credit score provides, it could be worthwhile to utilize one of the best credit monitoring services to keep your information secure.

Performing Credit Report Check Decreases Credit Score?

This is the biggest credit myth out there! Lenders make a ‘soft enquiryʼ with participating credit reporting bureaus. That means it is technically recorded, but it does not impact your credit score. Credit providers cannot see soft inquiries, so there are no cases of a decrease in the credit score by the credit check procedure.

Something One Needs To Keep In Mind

One statistic that has a significant impact on your financial future is your credit score. You could qualify for cheaper interest rates with a great credit score, which would lower the cost of any line of credit you take up. However, it is your responsibility as the borrower to maintain good credit so that you can take advantage of more lending opportunities in the future.