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What is a credit Score?
A credit score consists of three digits and they typically range from 300 - 850. This helps as an estimate of how likely are you able to repay your debt, how likely are you to pay your bills on time, credit risk, etc... The score is calculated from the transactions of your credit accounts. These transactional data are collected by the Credit Reporting agencies, which are also called as Credit Bureaus. The 3 major Credit Bureaus are Experian, TransUnion and Equifax.
Credit Score Ranges
Typically, credit score ranges from 300 - 850. This number helps show how Creditworthy an individual is. This score is based on the credit history. Lenders use this score to evaluate the credit risk, how likely is the individual capable to repay the debt on time. Everyone's financial situation is different and the lender's criteria for granting the credit also varies.
The credit score depicted in Credit Bureaus also vary as not all the creditors or lenders report to all three Credit bureaus. These credit score accepted may vary based on the financial institutions, some lenders also customize their own credit scoring programs. The most common credit score model is FICO developed by the Fair Isaac Corporation.
These are the basic FICO scores that are generally used by many lenders. There are also industry specific FICO scores used that ranges from 250 - 900, which are used for Auto loans and Credit cards.
Importance of having a Good Credit Score
Having good credit scores can come in handy and beneficial in a number of scenarios.
You may get a lower interest rates when buying or refinancing your mortgage.
Increases the chances of getting approved to credit cards.
It helps while upgrading credit cards for better rewards and benefits.
Better chances of getting lower insurance premium while purchasing Car Insurance.,
Easier approval while looking to rent a rental home.
You may get approved for higher credit limits on your credit cards.
It may even help you get better cell phone plans.
Helps get utility services more easier (according to FTC).
Some employers require certain credit score as a prerequisite for employment.
Ways to improve your credit score
Payment History
This shows how well your payments are made in a timely manner. Typically, a payment that is more than 30 days late are reported to the credit bureau and may impact your credit score. In general, higher the timely payments made, higher the credit score becomes. In cases such as Late payments more than 30 or 60 days, foreclosures, third party collections, defaults, bankruptcy the lenders report it to the Credit Bureaus and it may stay on your credit record for a considerable amount of time depending on the type of default.
Delinquency or late payment may remain on your record for 7 years.
Chapter 7 Bankruptcy (Total Liquidation of assets) may remain on your record for 10 years
Chapter 13 bankruptcy (develop a plan to repay partial or all of their debts) may remain on your record for 7 years.
Hard Credit inquiry may remain in your record for 2 years.
Setting up a new account, closing an account may remain for 3 months.
Maxing out a credit card may remain for 3 months.
Amount of credit utilized
This is the amount of credit that is utilized in revolving credit accounts. It is usually advisable to not to exceed 30% of the total credit available to increase the score.
The credit utilization ratio is also calculated for each credit account. If you have one credit card with high utilization and another credit card with zero utilization, still the high utilization on one card will hurt your credit score.
Increasing the Credit Limit
The higher the credit limit in your credit cards, lower the credit utilization ratio becomes. It can be done by either increasing the credit limit of your current credit card.
Length of credit history
The longer the time you have your accounts open and active and make timely payments, the higher the credit score will be. The average age of your credit might play a major role in determining the credit score.
Credit Mix
Having different types of loan such as installment loans (home, auto), credit card accounts. Lenders wish to see how well the individual is able to maintain payments of different types of accounts in a timely manner.
Set up automatic bill pay
Paying the bills on time helps to increase your credit score. By setting up automatic pay as much as possible, missed payments can be avoided. The longer you pay the bills in a timely manner, the higher the credit score increases.
Being an Authorized User
If your family member has a high credit score, you may join as an authorized user. By doing so, it may increase your credit score too if the account has a long payment history in a timely manner and low credit utilization ratio.
Monitoring your credit for and reporting errors
Credit monitoring services are a good way to track the changes and in your credit report. It may also help you in protecting against Identity theft and fraud. You may receive updates regarding the loan that has been paid off or new account opened etc. If you receive an alert for an activity that hasn't been done by you, you may report to the credit bureaus immediately for a suspected fraud. Experian, Credit wise etc provide credit monitoring services.
Monthly bill payments
By paying the monthly bill payments like Rental payment, utilities, cellphone, streaming services etc may help boost and give a positive impact on the information reported to the credit bureaus. By automating these payments, you may increase the credit score automatically.
Self Reporting
Generally, the credit bureaus build your credit record based on the number of accounts you have and how long the accounts have been paid in a timely manner. this may be a disadvantage for those who have a short or limited credit history. Programs like Experian Boost, UltraFICO may help boost your credit record.
How to get a free copy of your Credit Reports?
You may order a free copies of credit reports from each of the three major credit bureaus Experian, TransUnion and Equifax through the website Annualcreditreport.com. Federal law gives you the right to get one free copy annually from these credit bureaus. You can order all three copes at once or one at a time.
Repairing credit history or increasing credit score may need a lot of patience and discipline. Making regular payments in a timely manner and having better financial habits might help in expediting the process.