You may have heard a lot of people talking about the importance of your credit score. In every person’s life, he has probably heard of things like “building a good credit score” or “things that negatively affect your credit score”.
In this article, let us discuss the basics of your credit score. How exactly is your credit score calculated? What composes your credit? What factors affect your credit score? Read on the find out more about the answers.
What is a credit score?
A credit score is a number between 300 to 850 which helps lending companies evaluate a consumer’s creditworthiness. It determines the probability of the individual being able to repay his or her debts vis a vis his propensity to run away from his debts.
The rule is simple: the higher the individual’s score, the more trustworthy he is. This is from the point of view of the lending company.
The numbers 300 to 850 represent the range of trustworthiness. The following are the ranges and what they represent:
- The range beginning from 300 to 550 is considered as a bad credit range. Lenders are wary of this range and may require a high interest rate, a collateral, or automatically deny a loan altogether.
- A poor range begins from 550 to 649. Here, lenders still have stringent requirements but they do not automatically deny a loan application.
- A range is considered as fair when it ranges from 650 to 699. This applies to those who are trying to rebuild their credit.
- A good range is between 700 to 749 and an excellent credit score is 750 above; those who are within this range should have no problem getting a loan approval.
How is your credit score calculated?
Your credit score is calculated based on the following factors:
- Payment history - a determining factor is the payment history of the individual. Do you pay off your debts as they come due? Do you have any late payments but you eventually pay off the debts? Have you had a credit card cancelled? Your payment behavior is pivotal in the computation of your credit score.
- Total amount owed - how much do you currently owe? How much are you currently making? The percentage resulting from your current debt against the total amount that you are making is a big determinant in your score.
- Length of credit history - of course, old borrowers with a good payment history get a high credit score while relatively new ones still need to build a name for themselves.
- Types of credit - is your outstanding balance mainly focused on credit card debts? Do you have a good behavior in applying for loans such that you can get the right type of credit and not just credit card loans?
- New credit - a new determining factor is the new credit that you have applied for or are currently applying for. This is pivotal as well as it gives a preview of how you would take advantage of your credit.
Tips On How To Increase Your Credit Score
In order to get a better credit score, you can do any of the following things:
- Do not cancel cards you are not using if you want to increase your credit score. This tip is different from what others would advise you but we believe that since your credit utilization rate should be at 20 to 30 percent of your available credit, this is important. Canceling a card would increase your credit utilization rate and may end up destroying your credit score. If you want to make sure that cancelling a card would not affect your utilization rate, you should pay off some debts first before cancellation.
- Make sure that you pay off your debts as they become due. If possible, pay more than the minimum.
- Start saving money on banks. Let the banks get to know you.
You Have Total Control Over Your Score After All
If there is one lesson that every individual must keep in mind, it is the fact that the only person who has full control over his credit score is himself. There may be a lot of people all over the finance industry that would give tips on how to improve a credit score or how to maintain it.
The most important is to have full control over your own credit score which entails controlling your spending and paying off the debts as they come due. It may sound easy but these are the two things that most people fail on. Hence, the next time you find yourself asking: how is my credit score calculated? The next question should be: how do I control my finances to keep my credit score at a good level? Do that and you can base all of your decisions to the answer.