Credit Score plays an important role in determining the credit worthiness of an individual. Credit score, calculated using a statistical model, will give a numerical figure which shows an estimate of a person's financial creditworthiness.
In simple words, a credit score allows the money lenders to know whether a potential borrower will fail to make repayments of a credit, loan or any other credit obligation suitably within the period of loan. Experian, Equifax and TransUnion are three major credit reporting companies in the United States calculating credit scores with their own formula.
Credit score is usually calculated according to the information collected from a person's credit report. The credit score of an individual is based on the total outstanding debts,
making repayments within the due date, the number of credit inquiries on the credit report, and length of the credit history. Whenever a person apply for a credit or loan, the money lenders or the credit companies checks his/her credit score to determine whether to give credit or not. The payment history is considered as an important factor as the potential lender needs to know whether the individual make payments in a timely manner.
How credit companies make use of credit score
Majority of the lenders including banks, credit card companies, and other financial institutions utilize credit score rating to determine the risk in giving money to a potential borrower. That is, credit companies makes use of credit score to determine whether the individual is qualified for a loan, how much loan or credit can be granted for the individual, and fixing an interest rate (changes according to the credit score). Most money lending firms consider verification of credit score rates as an implementation of a trusted system. FICO score is the most widely known credit score in the United States ; there are also many others like Vantage and NextGen.
Credit Scores Range
Credit scores range between 300 to 850 points. A credit score of 720 and above is considered excellent for obtaining financing at lower interest rates. While a credit score below 600 is considered as poor and hence a person who has a poor credit score will find it difficult to get credit at lower interest rates. Most of the money lenders tend not to approve the loan application for those who are having a poor credit score. However, you may be able to find a money lender who is ready to give credit if you are having poor credit score, but you may have to pay high interest rates for getting such credits.
Improving Your Credit Score
There are several steps which helps you to improve your credit score. Making timely payments is one way to improve your credit score. Payment history accounts for about 40% of the calculation. So remember to pay your outstanding debts every month before the due date. Check your credit reports every month carefully and address any inaccuracies to the credit card companies through written mail.
One can also seek the help of credit counseling organizations or credit repair companies to improve your credit rating. Though the credit repair companies may not be able to completely clear your damaged credit rating, they can help you to find out any misinformation, omissions, errors, misinterpretation, or misreporting in your credit history. This helps you to address any evident issues or errors which had distorted your credit worthiness.
Taking care of and maintaining a high credit rating helps one to receive loans and credit at low interest rates. Remember, your credit score represents how you manage your finances and how timely do you make your payments. Paying off your debts and making timely repayments is the first step in improving your credit score.