About Credit Score - How to Improve Credit Score - Tips and Resources
Well in America wherever you go for big shopping such as Car, boat, furniture, jewelry, and home buying or borrowing a big loan for land/home or a personal loan, your credit score will be checked by businesses before making a decision on your credit request. Every bank, financial institution, lenders and big business do check every potential customers credit score before lending big money. What exactly is credit score? To know more about this subject, let's understand about credit score
Credit score is a 3-digit number drawn after statistical formulas are applied on an individuals credit file. Company called Fair Isaac developed the formula and their formula was called as FICO. Developed in 1970 by Fair Isaac, the credit score over the years has become a decision tool for financial institutions and lenders to judge the trustworthiness of a loan applicant. The higher credit score a loan applicant has it gives comfort zone to lenders in offering loan to borrowers. The higher credit score cuts the credit risk for lenders.
Credit Score Range
The FICO scoring model has eight categories to classify an individuals credit health. The FICO based credit score ranges between 350 to 850. Each range is labeled under credit score category.
- 350 – 499
- 500-549
- 600-649
- 650-699
- 700-749
- 750-799
- 800 – Above
Credit Score Categories
Based on persons credit score number people are classified into excellent credit, good credit, fair credit, bad credit and no-credit categories. Anything below 550 credit score is considered bad credit, 700 to 770 is considered good credit and above it is considered excellent credit. This categorization of credit score help lenders to cap loan to applicants and keep credit card balance limits in check.
Credit Score Makeup
Now the question is what is makeup of credit score? In order to drive credit score of a person from his/her credit files, the mathematical formula is applied on various parameters such as previous payment history. There shouldn't be any late payment or missed payment to lenders. Each can cause credit score to drop significantly. On time payments build your credit score and this parameter makes up for 35 percent of credit score. Next parameter is credit utilization. How much is available credit limit on your card or pending balance for mortgage. How much of it has been used or paid off. The balance in credit utilization keeps credit score higher. This adds another 30 percent of to credit score. Another important parameter is length of credit history. This deep insight on your positive credit history makes up for another 15 percent of credit score. Type of credit is another 10 percent to credit score. IT shows you are maintaining different type of credit such as payment plan, revolving, fixed consumer plan loans. Last ten percent is added on credit score for credit searches made by different vendors based on your request for new credit accounts, it can be bank account, credit card account, retail credit card account etc. The more searches on your credit file can pull your credit score down.
All these parameters are important to maintain. Missing one single payment or a derogatory complaint by vendor against your name at credit reporting agencies can severally impact your credit history thus bringing down credit score. Pay attention to your credit card bills, utility bills, doctor bills and make sure to see your credit report once a six month for accuracy. The free credit reports website let you see once a year credit report free. This is mandate by government that credit reporting agency should provide a free copy of credit report to consumers.
Questions and Answers
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