People who currently have a bad credit history may ask the same question – “How is my credit score calculated”? You probably desire to know about this too even though you currently have a good credit history. Besides, it pays to know how they came up with your credit score, right?
What Is A Credit Score?
A credit score is a number that represents the risks lenders take when allowing you to borrow money. FICO score is the most popular credit scoring. FICO stands for Fair Isaac Corporation. The VantageScore is another credit measurement. They develop it in partnership with the 3 credit bureaus – Equifax, Experian, and TransUnion. However, credit agencies commonly use the FICO score to indicate the borrowers’ risks.
A credit score usually ranges from 300 to 850. Have a look at these tiers to get an idea:
Excellent Credit: 750+
Good Credit: 700-749
Fair Credit: 650-699
Poor Credit: 600-649
Bad Credit: below 600
How Is A Credit Score Calculated?
The answer to the million-dollar question “How is a credit score calculated?” is not simple. Credit scoring is quite a complex process. It requires information from variables like payment history, number of credit accounts you have, amounts of credit, etc.
Credit scores also vary due to a number of reasons. These include that data used as a basis, the method of calculating the score, and the company that provides the score. The 3 credit bureaus, as well as other companies mentioned above, have different scoring models.
Credit scores may also vary per industry. For example, when you like to purchase a car, creditors and lenders will check your auto loan payment history. They may also compile credit scores from different companies to check your eligibility.
We’ll have a look at all these different factors individually…
Credit Score Basis #1: Payment History
Think about this. When a creditor takes a look at your credit score, they have one key question in mind. “Will this person pay back on time when I extend credit to him? They will then go over your payment history to come up with a sound decision. They will delve into your payment history for credit cards, installment loans, retail department store accounts, finance company auto loans, student loans, mortgage loans, home equity loans, etc.
The creditor or lender can also see your missed or late payments on your credit history. Moreover, they can find collection information and bankruptcies. Credit scoring models tackle how often you miss your dues, how much you owe, and how late you make payments. They will likewise see your delinquent accounts if there is any. Now, if you have 10 credit accounts and 6 of them have late payment records, the ratio can affect your score.
Just imagine how detailed of a process they go through in checking your payment history. They will consider all these information, which will have a huge impact in determining your credit score.
Credit Score Basis #2: Type of Credit Availed
The type of credit accounts you have also affect your credit score. Some of the accounts installment loans and revolving loans. Credit cards fall under the revolving debt. Home equity loans, mortgages, student loans, auto loans, personal loans, and others are under installment loans. Lenders and creditors check how well you manage mixed credit types.
Credit Score Basis #3: Used Credit Vs. Available Credit
Your spending and paying behavior also greatly impacts your score. Creditors and lenders check how much you used from your credit limit and how responsibly you pay your dues. So, if you have multiple credit cards that are maxed out, expect that these will reflect on your score.
Credit Score Basis #4: New Credit
The number of new credit accounts you opened recently is also a factor in calculating your score. More specifically, they identify your length of credit for these new accounts.
Credit Score Basis #5: Hard Inquiries
“Hard inquiries” refer to the process of checking that creditors and lenders do when you are applying for a credit. Application for a new utility or mortgage loans can lead to multiple queries. These, however, are counted as one inquiry over a period of time, which is usually between 14 to 45 days.
Inquiries made when you are applying for a pre-approved credit are not considered hard inquiries.
Credit Score Basis #6: Length of Credit History
Lenders and creditors also check how long each of your credit accounts has been active. They will check how responsibly you pay your old and new credit accounts.
Need More Information on How to Improve Your Credit Score?
Surely, paying your debts and having a good credit score is one of the steps to becoming financially free. Now, if you need more information on how to improve your credit score, feel free to schedule your 1-0n-1 consultation with me. Let’s discuss how we can move forward to becoming financially free.