How does it all Begin?
Your credit report is the accumulation of your entire financial history. There are three major agencies, which are responsible for maintaining your credit report – Equifax, Experian, and Transunion. The creation of credit scores takes place due to the collected information from every individual.
Although my FICO is responsible for creating the formulas for credit score calculation, the three companies have their variations. Due to this, you will observe your credit score to be different with each company. When you possess knowledge about the credit score, it becomes easier to maintain or improve accordingly.
What is a credit score? What does it mean to you?
It is a number with three digits, which indicate your financial health. Financial institutions such as banks and other types of lenders use credit score to determine how much credit you can avail and your credit score. It is vital that you know how companies calculate your credit score so that you know what to do with it.
What is the benefit of using credit score?
The main advantage of using credit score is that it removes all biases while making the entire system efficient and objective. For starters, credit score won’t differentiate you according to your color, age, employer, occupation, marital status, salary, religion, and race. As your credit scores are up-to-date, it doesn’t give a lot of importance to older data. Due to this reason, you can improve your credit score.
How are credit scores calculated?
Amount Owed/Outstanding Debt - Credit scores indicate the amount of trust the lender should have in the individual’s ability to repay the loan amount. Depending on how low your credit score is, lenders will be more cautious in handing out loans. The amount you owe any lender will account for 30% of the total credit score. It also takes the number of credit accounts you possess which have a balance. If most of your credit accounts have excess balance, it shows the financial institutions that you may not make timely payments.
Length of Credit History - Length of credit history is the time from which you started using credit. Approximately, it accounts for 10% of your credit score. The longer your history, the better it is for your credit score. It’s because the lenders have more information to go through, which is helpful in assessing risk. Keep in mind that if you open multiple credit accounts just for the sake of improving your history, it will have a negative impact on your credit score. The reason is the length of credit history takes three factors into consideration – your accounts average age, age of newest and oldest accounts. With multiple accounts, the average age reduces considerably.
New Credit/Recent Inquiries - New credit is a factor that sees if you are adding to your debt. It accounts for 10% of your credit score. The new credit will display the number of new accounts you opened with various lenders. When you want to take a loan from a lender, you will inquire about their terms and conditions. As the credit score uses recent inquiries as a part of its formula, it never makes too many of them. Multiple inquiries will reduce your credit score, which isn’t good at all. However, myFICO understands that customers make several inquiries as they want to get the best deal possible. As a result of this, myFICO won’t reduce your credit score, as long as your inquiries are within 30 days.
Payment History - Payment history is a record of all the credit activities that took place in your account. Every lender will take a look at your payment history as it indicates how reliable you are in making payments. It accounts for approximately 35% of your credit score. As it considers your entire payment history, having well-balanced credit is important. If your payment history shows a lot of late payments, collection items, and other unfavorable public records, it won’t fare well with your credit score.
Types of Credit in Use - Your credit score will also take the different types of credit you have taken in your accounts. Some of the types are retail accounts, finance company accounts, installment loans, and revolving credit to name a few. However, having various types of credit accounts won’t improve your score. As it accounts for 10% of your score, make sure that you have more types of credit accounts with good payment history, rather than the opposite.
How to manage your credit profile?
Make sure that you monitor your credit report regularly as inaccuracies can affect your score negatively. Always make sure that your credit information is up-to-date. Remember that making personal inquiries about your score won’t have an impact. It is always easier to fix inaccuracies than anything else. Contact the credit authorities immediately when you find any mistakes.
Also, be aware of your actions as it will help you make better decisions in life. For example, if you used to make late payments, you can fix the problem by paying your bills on time. The last tip is to follow up with the credit authorities after you report the mistakes, to find out if they corrected them.
At TakeThedrive, we make it easy to get a car loan, as we know your credit history doesn’t always reflect the truth of your payment abilities. Fill in your details in our Online Application to get started today!