- Credit Repair
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Credit score is defined as a statistical number that is used to evaluate the creditworthiness of a consumer. It is mainly based on a person’s credit history. Loan and credit lenders use their customer’s total score to evaluate whether or not they will be able to repay their debts. This figure will normally range between 850 and 300. A higher score in this case means that you are financially trustworthy and you can easily get credit or loans. Sp what is a good credit score?
The standard model to measure this score was created by FICO (Fair Isaac Corporation) and this is what is used by many financial institutions. There are other credit scoring systems in use such as the Vantage Score too, but they are not as popular as the one devised by FICO.
A good credit rating is easy to posses if you are able to maintain a long history of paying your bills on time as well as a low debt profile. Creditors have their own unique way of defining their ranges for of these scores. This is however the average score range:
- 750 and above – Excellent
- 700 to 749- Good
- 650 to 600- Fair
- 550 to 649- Poor
- Below 550- bad
Why is this important?
Your rating for credit is very important when you go looking for a lender. It will determine the lender’s decision to offer you credit. If you have a total rating of below 640, you are considered a subprime borrower. These are the kinds of borrowers who are charged a higher interest so as to cover for the higher risk they are considered to carry. Some lenders will require you to pay your loan at a shorter repayment term. Other lenders will require you to have a co-signer for a larger amount of loan.
People with a credit score of above 700 on the other hand are considered generally good and this means that they can easily get a loan at a much lower interest rate. In the end, they pay less money as interest over the life of the loan, which can be a longer period of time.
Your total credit rating will also determine the amount of deposit you will be required to pay when obtaining cable service, a cell phone, to rent an apartment and other utilities.
Credit card companies also review the overall score of their credit in order to determine whether or not to change their interest rate or credit limit on their cards.
What is a good credit score?
There is a lot of information particularly on the web on how important one’s credit score is and how one can boost their credit scoring to get considered for more affordable loans. But what is a good credit score when it comes to your own score? How can one tell that they have a good score or their score is among the best?
In most cases, one’s rating for credit is evaluated as per the FICO scores. There are at least three separate scores obtained from the three major credit reporting bureaus in the country. These scores are usually based on the information they have acquired on you. This means that you should be checking out your score from TransUnion, Experian and Equifax. These scores can be different but not significantly different. The average score can now be used to determine where your range is for your credit, between excellent and bad.
Getting a perfect score of 850 is considered difficult. This is because it would mean a perfect combination of all the factors that are considered for one’s score to be arrived at. A bad score on your credit is not that bad too; this is because there is always a chance for one to improve credit rating if they want to have a better credit report for a good loan.
There are good credit scores for different purposes
A good credit rating will mean a different thing to a different lender. Home loan lenders can qualify a person with a credit scoring of say 580 for FHA loans.
Conventional mortgages are however not easy to acquire if you have a total score of below 600. There are home loan lenders who will even require you to have a score of at least 700 before they can give you a good home loan. That is why financial advisors will advise you to work hard to improve your credit rating before you apply for a home loan. With a better score on your credit, you can easily qualify for a loan at a much lower interest rate, which means you will be paying less in the end.
Car leasers also get better terms and cheaper rates if they have a good score, which in most cases should be 720 and above. A person with a lower credit rate will end up paying more.
Credit score factors
There are mainly five factors that are evaluated when a person’s credit is being calculated. The three credit reporting agencies mentioned above use these factors, therefore their results should not be significantly different. Lenders and creditors use any of these agencies’ findings in determining whether or not to issue you with a loan. These factors are:
1. One’s payment history
This category shows whether you pay your obligations on time or not. It accounts for 35% of a total rating. This means that making repayments of past debt is the most important factor in the calculation of your overall rating. What many creditors consider is your past long-term behavior, which is believed to forecast your future long-term behavior. If you have not been paying your loans on time, it is easy to say that you will not be paying for a new loan on time. Both revolving loans and installment loans are considered in this case.
2. Total amount of money owed
This accounts for 30% of your score and it is mainly about credit utilization, which is the percentage of the available credit that you have borrowed. People who use their credit cards to the maximum and those who cannot handle a debt responsibly are likely to score low on this category. If you are not the kind of person who carries big balances and you pay your debts on time, you might have a good score right up to this level.
3. Length of credit history
This category is about the length of time each of your credit accounts has been open and the length of time since each of these accounts’ most recent action. This one accounts for 15% of your credit rate. This is the category which makes it hard for a person who is new to credit to have a perfect credit score. Those people with a longer credit history have more information and this can be used to provide useful information on the kind of debtor you are.
4. Types of credit
This one comprises of 10% of the total credit rating. This category seeks to determine the kinds of credit one can handle too well. You need to have the right credit mix though. Reporters believe that people who have a good mix of credit, both revolving and installment loans represent less risk for lenders.
5. New credit
This category seeks to determine the number and kind of new credit accounts you have opened recently. It does not benefit a person to open too many credit lines at the same time because this is an indication that you have serious financial issues. Any additional account you open should make sense financially. This category accounts for 10% of your credit rating.
Bad credit score
A low score is not necessarily a bad credit score; there is a big difference between the two. What is important is for everyone to know what their prospective loan lenders and creditors consider as credit risks in order not to be disqualified or charged highly when they apply for loans.
Sometimes getting a bad credit happens when one least expects it. It can be caused by a job loss, a bad economy or one’s mismanagement of credit. It however does not have to follow you around throughout your life. Some of the negative entries on your credit report will only appear there for a period of time. Others can take long though, that is why you need to learn how you can improve yours to score better.
Simple ways to improve credit scores
Improving one’s total score is not something that can happen overnight. Remember that your current credit rate has taken into account so many years of past behavior in your credit report and not your present actions. It will therefore take some time before you finally see the good result. Here are some simple actions that can help you improve your credit scores significantly:
1. Watch your credit card balances
This is a major factor and it takes into consideration the amount of money you have as revolving credit and how much of that you are actually using. A smaller percentage in this case will translate to a better credit rating. What you should aim at is a 30% and below.
If you already have bad credit, you can start by paying down your balances, and thereafter aim at maintaining low balances. For people with many credit card balances, you can consolidate them with maybe a personal loan. This will help your overall score a lot.
2. Eliminate credit card balances in totality
You can also eliminate the small balances that you have on a number of credit cards as a way to improve your total credit. One of the things credit reporting agencies look into is the number of your credit cards that have balances. If you are using many credit cards at the same time, you are hurting your rating for credit. This can be solved by paying all the small balances on your credit cards, and then choose one or two cards that you will be using for everything.
3. Ensure you pay your bills on time
One thing that will help you score very well is if you are making on-time payments on your bills. For people who are planning on getting a huge amount of credit, say to buy a home or a car, this is one of the things your lenders will consider. Even if you have enough savings, not paying your bills on time could cause a significant drop on your credit score and this may hurt your quest to get a good home or car loan.
4. Leave your old debts on your credit report
An old debt on your credit report is not that bad, therefore do not remove it once it is paid off. If you have a good debt for instance, one that you have handled well and paid on time, it represents a good credit history and this is good for your total credit. Do not be quick to remove those old debts and good accounts; let them stay as long as possible.
5. Do not take risks
There is a lot of information these days on what could lead to a drop in one’s score. A lot of people do not pay attention to this information until it is too late. It is not advisable to skip payments or to pay less than you are required when you are repaying back a loan. These are the things you should avoid doing as they could sink your credit rating. Other things you need to watch out for are for instance taking cash advances on your card, using your card in businesses that could result to current or future financial crisis among many others.
Improving your score is something that should be done on a continuous basis. This is what ensures that your total credit is good when the time to get a loan comes. Do not wait until you are close to applying for a loan to start repairing your credit.
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