How to build an impressive credit score by knowing its various facets

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Sachin ReddyWritten by:

Do you know that prospective job aspirants must have a good credit score to secure a job? Employers are keen to judge the credit history of employees to understand their behavior and trustworthiness as reflected in the way they manage credits. A good credit score reflects the disciplined behavior of the person in managing credits who knows how to address the priorities in life and thus deemed dependable for employment.

But such use of credit score is a very recent phenomenon because banks and financial institutions including lenders are the primary users of credit score to assess the creditworthiness of individuals. A credit report includes the complete credit history of individuals and demonstrates how reliable a person is in handling credits that underlines their trustworthiness as a borrower. By looking at the score, anyone can understand how good you are in handling credits and debt accounts.

What it contains

Credit reports contain detailed information about the accumulated credits of individuals together with information about where they live, their employment details, how they pay their bills, whether there was any lawsuit judgment initiated against them or had they filed for bankruptcy and whether there is any record of home foreclosure or vehicle repossession.  The report makes it is easy to judge a person’s behavior with respect to managing fiscal matters that indicate how reliable they are in handling credits.

Use of credit score by lenders

Banks and lending companies get a complete picture of borrowers by analyzing the credit history that bears the mark of their conduct in handling credit as reflected in the credit score. High credit score means that the individual has a good track record in managing credits, hence can be trusted more over those who have a poor credit score.

Three agencies namely Experian, Equifax, and TransUnion are responsible for compilation of the credit score and treated as the major credit reporting agencies. Every debt that you take goes on record and captures all transactions related to it. Banks and financial institutions use the credit information of individuals to take lending decisions and whether you could get a loan depends solely on your credit score.

Good and bad credit score

A credit score is a measurement of how you handle credit and computed on a scale of 300 to 850 with the best score starting from 700.  Typically, if you have a FICO credit score of 700 and above, lenders would consider you very reliable as a borrower and getting loans would be quite easy. Scores of 750 and above denote excellent credit, 700-749 is good credit, 650-699 is fair credit, 600-649 is poor credit and below 600 is bad credit. Before you apply for a loan, by looking at your credit score you can gauge the prospects of getting the loan approved.

Loan eligibility and credit score

The categories of credit score are not binding on lenders who can analyze it in their own ways. The credit score is only a guideline for lenders to asses an individual, but they have their own standards of considering which kind of credit score they would like to treat as good, and it depends on their business policy. For example, if a lender wants to approve more borrowers to increase business might accept borrowers with 680 credit score or higher.  Some other lenders might stick to the 750 marks to select borrowers with whom they would like to do business.

Credit score and interest rate

Besides using a credit score to determine eligibility for loans, lenders determine the rate of interest of loans based on it. The interest rate depends on the perception of risk by lenders with low credit score meaning high risk and a high score relating to low risk. Therefore, even if you are eligible for a loan with a fair credit score ranging between 650 and 699 get ready to pay higher interest than those with a better credit score. If getting loans at the best interest rate is your goal then you must have a credit score 750 and above.

What is a FICO credit score?

Anyone who has taken debt at some point in time must be aware of the term FICO score. The credit score that the majority of creditors use is based on various credit reports generated by the different agencies. By using the reports of the consumer credit reporting bureaus, Fair and Isaac Corporation or FICO, a credit scoring company, first introduced the credit risk score in 1981.

The FICO credit score is a synthesis of all kinds of different information on various credit rating agencies contained in their credit reports. The process of credit score computation normalizes the variations in reports to arrive at a logical conclusion about the credibility of the individual borrower.

What is a Vantage Score?

Besides FICO score a new scoring model named Vantage Score emerged about a decade ago as a collaborative effort between Experian, Equifax and TranUnion.  The purpose of the Vantage Score is the same as the FICO score, and both could be competitors. Although the majority of credit companies rely on FICO score, many lenders are looking at the Vantage Score too to determine the reliability level of borrowers. Both the scoring models use similar information for arriving at a credit score although the methods of analysis might be different.

Vantage Score is especially suited for those with short credit history because a FICO score requires at least six months of credit history and there must be one reported account during the last six months.

What affects your FICO score?

FICO credit score depends on various information contained in consumer credit reports, and different pieces of information can impact your score in different ways. Your payment history and owed amounts constitute 35% and 30% respectively while the length of credit history (15%), credit mix (10%) and new credit (10%) are the other elements that influence the FICO score.

The percentage values may differ according to the scoring model and overall credit file but understanding the importance of scoring factors should help to improve your credit score by building a good credit history.

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