Credit score and its significance
The credit score is one of the most significant factors that affect the financial lives of all the consumers. Credit score represents the creditworthiness of an individual. A credit score is mainly based on the information provided in your credit report that is usually sourced from credit bureaus or credit reference agencies. In this article, you will find out why credit scores are so significant, how your score affects the interest you pay for all kinds of loans and even insurance, what are the different types of scores and how different bureaus provide your credit score.
Why your credit score is important:A credit score is a single three digit number that is calculated through a mathematical formula and it helps the lenders assess your creditworthiness. The higher your credit score, the chances are higher that you will be approved for loans and receive favorable interest rates. When you apply for a credit card, mortgage, or even a car loan, your credit score is verified. On the basis of your score, lenders will evaluate what risk you pose to them. If you have a very poor credit score, lenders may not show you the door, but will charge you higher interest rate.
Types of credit scores: There are various types of credit scores based on the model used to calculate them. One such popular credit scoring model is the FICO score. FICO stands for Fair Isaac CorporationÍÕhe company that introduced the mathematical formula to evaluate credit scores. A FICO score usually has a minimum of 300 and a maximum of 850. Usually a FICO score of 700 and higher/above indicates exceptional or very good credit where as a FICO score of say 499 means bad credit.
The FICO score is provided by three major credit bureaus namely Experian, Equifax and TransUnion. Each of these credit bureaus has its own scoring method that is based on the FICO scoring method. For instance, TransUnion has the Empirica system, Equifax has the Beacon system, and Experian has the Experian/Fair Isaac system. That’s probably the reason why you have three different credit scores for any given scoring model. This variation in the FICO scores affects the interest rates charged on a certain loan amount. Hence in 2006, the three major credit reporting agencies introduced Vantage Score to have a consistent scoring model that will offer the borrowers reasonable interest rates on the loans they take.
Vantage Score ranges from 501 to 990 and also uses letter grades from A to F to specify different ranges of scores. The Vantage score enables the lenders to accurately assess their borrowers in a consistent manner. Apart from FICO and vantage scores, there are alternative scores like FICO Expansion Score, PRBC Score, Anthem Score and efunds meant especially for borrowers who have poor credit record.
How the credit bureaus assess your credit score:
When you borrow money and pay for it, your lender directs the information to a credit bureau. On the basis of the information in the credit report, the bureau determines a credit score. Usually your credit score is based on five important factors:
- Payment history (35%): Your credit score is affected by how many bills you have paid on time, how many delinquent accounts you have, if you have gone through bankruptcy, etc.
- Outstanding Debt (30%): The second factor is your present status of indebtedness. If you owe a lot of money on numerous accounts then it means that you are financially burdened and there are enough chances that you will be making late payments late or even no payment at all.
- Length of your credit history (15%): The third factor is the duration of your credit history. A longer credit history shows that you can sensibly take care of your available credit over time.
- Credit Mix (10%): Having different kinds of debt helps in improving your credit score. Thus having a combination of car loan, mortgage, and credit card is better than having only one kind of debt. *New Credit (approximately 10%): The fourth factor includes the types of credit accounts you currently have. Thus, if you have a short credit history and have opened several credit accounts in a short period of time then it surely will have a bad effect on your credit worthiness. Your credit score helps to evaluate whether it is a risk to offer you loans or not. This is because your score reflects how efficiently you have managed your debts in the past. So, pay off your past loans quickly, keep balances low on your credit cards, build on your credit history, think twice before opening numerous accounts and diversify your credit to boost your credit score.Some Resources:Homeowner Loans – Finders of low rate homeowner loans for working UK applicants.Lorenzo Mortgage Company, Inc. – NY State Mortgage Broker specializing in purchases, refinancing, debt consolidation, home equity loans, reverse mortgages and commercial loans.Transact Money Website Transactmoney.com is the site where you can get complete information on money transaction and helps you in overcoming doubts in transacting money. Transactmoney.com is also a home for articles on online invoices, credit card transaction processing, accept payments online and so on.News and discussions about reverse mortgage – Its one of the preferred blogs on reverse mortgage that I have ever seen. The subject matter has been simply defined and explained with latest information.Independant Mortgage Advice – Easy, free, friendly mortgage advice and reccomendations from professionals. CA Mortgage Brokers is a full service wholesale mortgage company specializing in California home loans and refinancing. Whatever your residential financial needs, we will tailor a loan that’s right for you.New Home Connection — Colorado Springs Real Estate – Colorado Springs real estate searches plus the ability to look at more than 500 new homes and receive all the relocation information you need.Prepaid credit card – Find the best prepaid credit cards online. Buy prepaid credit cards at Obopay.com and get all the convenience of a regular credit card.Consolidation Loan – Finders of low rate consolidation loans for UK homeowners and tenants.
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