A credit score determines an individual's creditworthiness. From the number of accounts that a person has to the debts acquired along with their repayment history - a credit score is what determines if a lender should let you borrow money. In simple words, the credit score determines whether you would be able to return a loan as per the schedule or not.
In a rapidly growing and busy world, people don’t really have time to take cash out of the bank and pay off wherever they go. Thus, they use the ease of credit cards - the slim carry anywhere and everywhere accessory. However, it does come with the heavy responsibility of not exceeding the limits and keeping a good credit score.
What Is Credit Score?
A credit score is what determines the likelihood of you paying back a loan or any other form of borrowed money from any financial institution. It is a three-digit number that lies on the scale of Three Hundred (300) to Eight Hundred and Fifty (850).
For a lender, your credit score establishes facts about whether or not you should be lent money. These scores are acquired from a number of credit bureaus and turned into reports that your lender can assess.
What Is A Perfect Credit Score?
Following are the ranges which divide the credit score into categories of excellent, good, fair, and poor.
- An excellent score falls into the range of seven hundred and twenty (720) or higher
- A good score falls into the range of six hundred and ninety (690) and seven hundred and nineteen (719)
- A fair score falls between six hundred and thirty (630) and six hundred and eighty nine (689)
- A poor score is six hundred and twenty (629) or below
As the credit bureaus assess your ability to borrow and repay loans, they also take several other factors into consideration. Along with the score reports, your income also counts. Moreover, any previous debts that you may have are also taken into account.
Related: Financial Lessons You Need to Learn From 5 Major Bankruptcies
The Three Credit Bureaus
There are three credit bureaus that dominate the financial market. These agencies collect data relevant to your financial history and compile it into credit reports. Thus, these bureaus are of utmost importance as they determine your credit score.
1- Equifax
Equifax is an American credit reporting agency that operates multi-nationally. It not only collects and processes financial data of millions of individuals, but it also deals with creating credit reports of over eighty-eight million business set-ups across the globe.
Founded in 1899 and worth a whopping revenue of 4.128 billion USD, Equifax is run by the current Chief Executive Officer Mark Begor.
2. Experian
This American-Irish credit reporting firm collects data of more than a billion people as well as businesses across the globe. It also has functional operational units at a multinational scale. With its headquarters in Dublin, this multinational financial giant is headed by Brian Cassin as the current Chief Executive Officer.
3. TransUnion
This credit reporting firm also collects information on more than a billion consumers from over 30 countries. Founded in the year 1968, TransUnion is now run by Chris Cartwright as the Chief Executive Officer.
These credit bureaus calculate the score using various score models.
Fair Isaac Corporation (FICO) Scores - The FICO Score Model
FICO is an analytics software firm. The FICO scores are calculated by the Fair Isaac Corporation taking into account 5 fundamental components.
- Current Debt
- Types of Credit Utilized
- Length of Credit History
- New Credit Accounts
- Payment History
As of January 23rd, 2020 FICO uses the updated scoring method called the FICO Score 10 Suite.
As per the FICO scoring method, scores falling into the range of 670 to 739 are GOOD.
The Vantage Score Model
This score analyzer works with the credit reporting giants to analyze the credit reports. Similar to FICO, the vantage score model breaks down the various components of an individual’s financial history to generate a credit score. This model describes the components as being extremely influential to less influential.
- Payment history constitutes 40 percent of influence
- Depth of credit constitutes 21 percent of influence
- Utilization constitutes 20 percent of influence
- Balances constitute 11 percent of influence
- Recent credit applications constitute 5 percent of influence
- Available credit constitutes 3 percent of influence
The vantage score also ranges from 300 to 850 just like the FICO model. With the introduction of the new vantage score 4.0, the model utilizes current data and machine learning to acquire an in-depth view of your credit reports. This way, your credit scores are more reliable and better.
How Can You Improve Your Credit Score?
Your credit score determines whether you get a loan or not. If you are a student and require a student loan to complete your higher studies, you might be in dire need of a good credit score. It also helps with every other financial matter - for instance, loans for automobiles and the rates on a mortgage.
Here is how you can keep a good credit score to aid with your financial matters;
- Pay your bills on time
Payment history makes up a huge chunk of the factors that determine your credit score. Thus, make sure that whatever repayments are scheduled, you pay them timely. Moreover, keep up with payments of all sorts to keep clean credit history. You can set due date alerts as reminders, create a filing system to keep track of the bills, and automate the regular payments.
For a perfect credit score, pay off any debts that you may have.
- Monitor your credit
Monitor the changes in your credit report so that you have all the necessary updates about everything. Moreover, monitoring your credit score on a regular basis helps correct errors and remove delinquencies from your report.
Key Takeaways
- Your credit scores determine your credit-worthiness
- Equifax, Experian, and TransUnion are the major stakeholders in the credit reporting financial field
- FICO and Vantage scores may differ slightly as these two score analyzing software firms use different models to determine the scores
- You can improve your scores by paying your bills on time and regularly monitoring your accounts
