Indept Guide into what a Credit Score is – Myths and Facts

Indept Guide into what a Credit Score is - Myths and Facts

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In this article we will be taking a look at what is a Credit Score, Why is the credit score so important, What is a Good credit score, How does a Credit score works, Tips to quickly improve your credit score, Factors that Impact Your Credit Score?, How Long Does it take to Improve Credit Score?, Myths about Credit score and alot more.

Your credit score is a single figure that has the potential to cost or save you a lot of money over the course of your life. You can get lower interest rates if you have a good credit score, which means you will pay less for whatever line of credit you take up. However, it is up to you, the borrower, to ensure that your credit remains healthy so that you have additional borrowing options if you need them.

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The Fair Isaac Corporation, often known as FICO, developed the credit score model, which is utilized by financial institutions. Although there are several credit-scoring systems, the FICO score is by far the most popular. A person’s credit score can be improved in a number of ways, including timely loan repayment and keeping debt low.

What is a Credit Score

A credit score is a three-digit number, typically between 300 and 850, designed to represent your credit risk, or the likelihood you will pay your bills on time (creditworthiness). A borrower’s credit score improves the way he or she appears to potential lenders. A credit score is calculated using information from your credit history, such as the number of accounts you have open, the total amount of debt you owe, and your repayment history, among other things. Credit scores are used by lenders to assess the likelihood of a borrower repaying a loan on time.

Those with good to outstanding credit scores—FICO defines this as a score of 670 or higher—pose a decreased risk of default to a lender.

Credit cards with lower interest rates, as well as bigger rewards and other incentives, may be available to people with better credit scores. A premium American Express travel card with plenty of features and rewards, for example, is usually only offered to people with excellent credit.

Why is the Credit Score Important

Most people will save hundreds of thousands of dollars over the course of their lives if they have a decent or exceptional credit score. Mortgages, vehicle loans, and other forms of finance are more affordable for people with good credit. Better credit scores are considered lower-risk borrowers, and more banks are striving for their business by offering better rates, fees, and bonuses. Those with bad credit ratings, on the other hand, are regarded as higher-risk consumers, with fewer lenders competing for their business and more firms getting away with illegally high annual percentage rates (APRs). Furthermore, because your credit score influences your insurance score, a poor credit score can affect your ability to locate rental accommodation, rent a car, and even get life insurance.

What Is a Good Credit Score?

A good credit score is defined differently, depending on which model you’re using. A good FICO credit score is anywhere from 670 to 739. Anything below that would be fair or poor credit, while anything above it is either very good or exceptional credit.
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Excellent: 800 to 850
Very Good: 740 to 799
Good: 670 to 739
Fair: 580 to 669
Poor: 300 to 579

How does Credit Score Works

Credit scores aren’t generated by a magic wand; instead, they’re calculated utilizing various credit scoring methods. 90% of top lenders utilize the FICO credit score model when making credit decisions. 1 Another credit scoring model is VantageScore.

Credit scores are calculated using information from your credit report in both models. A credit report contains information about your previous financial transactions, such as:

  • Number of credit accounts you have in your name
  • Balances and payment history for those accounts
  • Inquiries for new credit applications
  • Public records, including judgments, bankruptcies, and foreclosure proceedings

Your credit report may not contain much information if you have no credit history. As a result, calculating a credit score might be tricky. According to the Consumer Financial Protection Bureau, 45 million Americans are “credit Invisibles,” meaning they lack sufficient credit history to obtain a credit score.

What Is a Good FICO Score?

FICO® generates a variety of credit scores for consumers. The organization creates “basic” FICO® Scores for lenders across a variety of industries, as well as industry-specific credit scores for credit card issuers and auto lenders.

FICO® Scores vary from 300 to 850, with 670 to 739 being considered “excellent” by FICO. FICOindustry-specific ®’s credit scores range from 250 to 900 points. The intermediate categories, on the other hand, have the same groupings, and a “excellent” industry-specific FICO® Score ranges from 670 to 739. According to experian

FICO<sup>®</sup> Score ranges

What Is a Good VantageScore?

VantageScore’s first two credit scoring models had ranges of 501 to 990. The two newest VantageScore credit scores (VantageScore 3.0 and 4.0) use a 300 to 850 range—the same as the base FICO® Scores. For the latest models, VantageScore defines 661 to 780 as its good range.

VantageScore ranges

Factors that Impact Your Credit Score?

Here are some tried-and-true credit behaviors to remember as you start to create – or maintain – responsible credit habits:

  • Pay your bills on time, every time. Always pay your payments on time. This isn’t limited to credit cards; late or missed payments on other accounts, such as cell phones, can be reported to credit agencies, affecting your credit score. If you’re experiencing problems paying a bill, get in touch with your lender right away. Even if you’re disputing a charge, don’t miss payments.
  • Pay off your debts as quickly as you can.
  • Keep your credit card balance well below the limit. Maintain a credit card balance that is substantially below the credit card limit. Your credit score may be impacted if you have a higher balance than your credit limit.
  • Apply for credit sparingly. Applying for multiple credit accounts within a short time period may impact your credit score.
  • Keep an eye on your credit reports on a frequent basis. Request a free copy of your credit report and review it to ensure that your personal information is right and that no account information is incorrect or incomplete. By visiting www.annualcreditreport.com, you may get a free copy of your credit reports from each of the three nationwide credit bureaus every 12 months. You may keep track of your reports all year long by requesting a copy from one every four months. It’s important to remember that reviewing your own credit report or credit score has no bearing on your credit ratings.

Tips to quickly improve your credit score?

*Check your credit score to see why it is low.
*Pay down your revolving credit as much as possible to lower your credit utilization percentage.
*Have any inaccurate things removed (especially late payments).
*Be added as an authorized user to an old account with perfect payment history, ideally with a low utilization rate. Ideally, this is done by a friend or relative, and they do not even have to give you the card. You can also pay certain credit repair services that will broker a deal between you and a stranger to do this.

Does Getting a New Credit Card Hurt Your Credit score?

Depending on your position, getting a new credit card might either hurt or benefit your credit. It can help you improve your credit utilization percentage and boost your credit mix, but it will add a new hard inquiry to your account and make your average credit age younger, both of which might harm your score.

Adding a new credit card will most certainly lower your credit score in the near term but will lead to a greater credit score in the long run for individuals in the credit-building stage.

How Long Does it take to Improve Credit Score?

Your credit score does not rise by a fixed minimum, maximum, or average amount of points each month, and each action does not gain a set number of points. The length of time it takes to improve your credit is determined on the reasons for your low credit score.

Your credit score might rise dramatically in a month if the biggest problems on your credit report are credit overuse and you pay off your balances. If you have a low credit score due to frequent collections and a poor payment history, it will take several months of on-time payments to notice any improvement in your credit score.

7 Myths about Credit Score

1. You have a universal or overall credit score.
There are numerous credit scores, each of which is calculated differently. Furthermore, your creditors and lenders may report information to all three national credit agencies — Equifax®, Experian®, and TransUnion® — or just one or two, or none at all. As a result, your credit ratings may vary amongst the three credit bureaus.

2. There is a credit “blacklist.”
Lenders and creditors are the ones who determine your creditworthiness, not credit bureaus. Your credit reports only contain information about the credit accounts you have or have had, as well as enquiries from companies when you ask for credit and collections accounts or bankruptcies. Lenders and creditors interpret and apply the information in your credit reports in their own unique ways, and they may use additional factors to analyze your credit application. There may be similar factors in your credit history that lead several lender rejections, but there is no such thing as a “blacklist.”

3. Your relationship status and whether you live alone can impact your credit scores.
Your credit reports contain information on you, not your relatives, partners, or former roommates. Living with someone or being in a relationship has no bearing on your credit ratings, and lenders are prohibited from considering your relationship status when making lending decisions.
When you apply for a joint account, such as a credit card or a mortgage, the lender will typically look at both of your credit reports to establish your trustworthiness. Your relationship status, on the other hand, has no bearing on this decision.
Also, keep in mind that accounts you’ve co-signed with someone else may have an impact on your credit scores.

4. If I pay off a debt, any late or missed payments on that account will be removed.
That’s not the case. Late payments can remain on your Equifax credit report for up to seven years from the date you missed the payment. And late or missed payments remain even after the debt is paid.
Credit reports, credit scores and credit bureaus can all seem complicated, but they don’t have to be. Educating yourself on what they all mean – and actions you can take – is a great first step.

5. Approaching your credit limit will not negatively impact your credit scores.
Even if you pay off your credit cards every month, if your credit utilization ratio is high, it may impact your credit scores. Your credit utilization ratio represents how much revolving credit you’re using compared to the total amount available to you. Revolving accounts, such as credit cards or personal lines of credit, do not have a fixed number of payments. Installment loans, such as vehicle loans, do. When you pay your vehicle loan in full, the account would be closed and marked as paid. Keep in mind there are many different credit scoring models with different ways of calculating credit scores.

6. Good credit scores guarantee you’ll be approved for credit?
When it comes to credit scores, keep in mind that there is no “magic number” that guarantees acceptance. Aside from the numerous credit scores available, lenders and creditors may have their own approval requirements and may consider aspects such as your salary when making their judgment.

7. Getting married change your credit scores?
NO, getting married does not change your credit score . Even after you get married, you keep your separate credit history. If you and your spouse open joint accounts, both of your credit ratings will be affected by how the account is managed in the future, but marriage has no effect on your credit scores.

How to Check Your Credit Score

It’s a good idea to know where you stand before applying for a credit card. You can check your score in a variety of methods, including:
*Use a free credit score site. It’s a good idea to check your score through a reputable site like AnnualCreditReport.com once per year to make sure there aren’t any errors on your report that could have an adverse impact on your score.
*Check through a current credit card. Most major credit card issuers will give you a free credit report as an account benefit.
*Check via a nonprofit credit counselor. If you’re looking for help overcoming debt repayment challenges impacting your credit, nonprofit credit counseling organizations, like the National Foundation for Credit Counseling (NFCC), can pull your report and score at no cost and review the results with you.

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