How to have a good credit score?

When you applied for a credit or a loan, you consciously agreed to have a debt. And there is a chance that you won’t be able to pay this sum off. That’s why lenders want to check you before giving you money. They want to be sure they will get their money back. On the one hand they earn because you pay interests on money borrowed. On the other hand they can lose money if you won’t be able to pay off the debt. Nowadays it is very easy to check your payment capacity. They request for your credit report and see your credit scores. This figure is one of the most important aspects of your credit.

How does credit score work? Why is it becaming more and more important these days? The fact is that your credit score can cost you lots of money. Credit score becomes more and more important because in the digital age that moves with a speed of light just about every major lender often has to make very fast credit decisions in order to keep up the competition and that’s what they have to do. If they don’t provide relatively quick lending decisions, they may lose a lot. So how do they make decisions and not put themselves into a great risk? Lenders rely more and more on the consumers three digit scores. Based on your three digit credit scores and the related information in your credit report lenders decide whether not to approve your applications and how much interest to charge you.

How does credit score work?

So let’s take a look how credit scores work. There are three major credit bureaus in the U.S. each of them assigns you when you need it. A credit scores have their own name for what is generally known as a FICO score, this name is originating from the Fair Isaac Corporation. Now Equifax calls its FICO score Beacon Score. Experian refers to Fair Isaac Risk Model Score. And TransUnion calls your FICO score the EMPIRICA Score. All the three bureaus use the slightly different formulas to calculate your credit score. That’s why your credit score will vary from bureau to bureau. Over all credit score is generally ranged between 300 and 900. The average credit score in the United States is about 678. If you are above average, you have a better chance to get lower interest rates and save your money. Lower than average, your chances are worse and you’ll have to pay more for credit.

Good news is that it doesn’t matter what your credit score is, you can always improve it. Your credit score is constantly changing as new credit information is added to files. Understanding how the information in your credit report is weighted can give you a good idea of what you can do to help you improve your credit score.

What does your credit score consist of?

So quickly let’s review how the information in your credit report is weighted to determine your credit score:

Your payment history accounts for roughly 35% of your overall score. This category will include account payment and status of your credit cards, retail and department store cards, stored loans, mortgages, finance companies and many more. Paying your bills on time is the number one way you can help to improve your credit score. History of recent payments has most weight. For example, one late payment over the past few months can lower your score more than ninety days late payment several years ago.

Your amounts owed (the amount of outstanding debt) accounts for roughly 30% of your overall score. This includes the amount of money you owe on specific accounts. The number of accounts you have with balances you debt to available credit ration or what proportion of your total credit limit is currently being in use. As a rule, higher credit ratings are achieved by individuals who have a lot of available credits but use not all money that was lended. Lenders like to see consumers who use about 25% to 35% of their available credit.

Your length of credit history accounts for about 15% of your total credit score. This includes the period of time since your accounts have been opened. The longer your history of maintaining of good credit habits is, the higher your credit scores will be. This means you should think twice before closing your old account. Because you could reduce the amount of credit history you are presenting to lenders.

Your amount of new credit or number of credit inquiries accounts for roughly 10% of your credit score. For instance how many applications for credit cards and loans you had recently. When you check your own credit report, this will not affect your credit score. But when lenders check it, your credit score will be reduced slightly for each application. Too many applications for credit over a short period of time will lower your score. Lenders often see this as an indication you may be having rough times with your finances and you are taking too much debts.

The next category is a type of credit used. It accounts for approximately 10% of your credit score. This category includes different mixes of accounts you have: credit card, mortgages, finance companies accounts etc. But there is no secret formula for the mix of credit which produces the higher score. Generally creditors like to see a healthy balance of credit.

It’s important to understand that credit scoring involves all factors are really meaningful, not just two or three of them. And all of them are quite equal for each consumer. And lenders usually will not rely only on a credit score. But other factors as well including income, employment status, using your present address and the type of credit for which you were applying. Over all credit scores can be a very valuable asset for consumer. You should pay attention to know your score, know how to manage and protect it.