Understanding Credit Score
When did you last analyze what affects your credit? You have borrowed money, taken loans; mortgages etc. but have you given a thought as to what resulted in your getting a loan easily with a low rate of interest or what lead to a denial from a creditor? These questions are directly related to the factor “your credit score”. Your credit transactions are reported to the credit bureaus who assign you a three digit number ranging from 300-900 based on certain calculations. Let us begin with the understanding of the whole process.
Knowing what is a Credit Score:
A credit score as mentioned earlier is a three digit number ranging from 300-900. This score is generated on the basis of a mathematical calculation. There are various factors which are considered while calculating this score. Each factor is defined on a percentage basis. The following are the factors that determine your score:
| Payment History | 35% |
| Amounts Owed | 30% |
| Length of Credit History | 15% |
| New Credit | 10% |
| Types of Credit Used | 10% |
Knowing what is “good” and what is a “bad” credit score:
The three digit numbers determine whether a score is good or bad. Follow the given chart to find out what defines a good and a bad score.
| Score Range | Score Category |
| 700 and above | Excellent Score |
| 500-699 | Average Score |
| 499 and below | Bad score |
Knowing the uses of a credit score:
There are certain uses of a credit score which makes it an indispensable part of life. The uses can be compiled within few points:
- For any financial transaction your credit report will be pulled out to know your financial behavior. The creditor has to know where he is investing money, whether he will be paid back or not. However the credit report comes into action for the knowledge of your background but the score helps in analyzing your creditworthiness. It is an easier and less time consuming way for your creditor.
- If you have maintained a good track record and your score reflects the “excellent” criteria then you will be entitled to much lower rates of interest. See the figure below to understand the procedure with the examples of mortgage rates.
| Score | % of Rate | Monthly Payment |
| 720-850 | 5.49 | $851 |
| 700-719 | 5.61 | $862 |
| 675-699 | 6.15 | $914 |
| 620-674 | 7.30 | $1,028 |
| 560-619 | 8.53 | $1,157 |
| 500-559 | 9.29 | $1,238 |
- The credit score also helps you to maintain your track record. Giving a hypothetical condition; you have not taken any loan recently and have paid all the previous loans on time. However after three months while applying for a car loan you are rejected. What might have happened is that there has been a wrong information reported on your credit report which has lead to the decrease in your credit score as well and hence the rejection. Therefore you need to be very careful. Knowing your credit score is necessary to manage your credit accounts well and proving your creditworthiness.
Knowing the types of credit score:
Lenders can use different scoring models but the most popular of its kind is the FICO (Fair Isaac Corp.) score. The range is 300-850 and the majority of consumers fall in the range of 600-800. The three major credit bureaus Equifax, TransUnion, Experian have different names for their version of FICO. Equifax has the Beacon score, TransUnion has Empirica and Experian has Fair Isaac Risk Model. They use different versions and come up with varied scores. To avoid this controversial scoring, the three bureaus have come together and developed a new scoring model “Vantage” score to be used by all of them. This score can be bought online at $6 from the Experian website. The scoring ranges from 501-990 graded between A-F; best score indicated by A.
The other scores apart from the FICO and Vantage are PRBC Score, Fico Expansion score, e-funds and Anthem score.
Credit score might sound redundant but its effect is enormous. Every aspect of your financial life is judged by this score. Thus being on your guard and making sensible financial decisions will keep you light with higher scores and better interest rates.
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