Credit Scoring Basics and How That Affects You

A Credit Score is designed to measure the risk of default by taking into account various factors in a person's financial history. The exact formula for credit scoring is still a closely guarded secret, but it largely depends upon the factors such as punctuality of payment in the past, length of credit history, types of credit used (installment, revolving, consumer finance), recent search for credit and/or amount of credit obtained recently etc. These factors are provided by Fair Isaac Corporation. Known as Fico credit scores they are popular and widely used all over America. Lenders look at your credit score before lending to you. There are also other scores such as Next Gen, Vantage Score and CE Score. Credit reporting agencies like Transunion, Equifax and Experian are asked to develop credit reports and scores by the lenders.

Your present income, employment history, education if any, whether you had a student loan and completed repaying it successfully are all recorded in your credit statements and that determines your credit score. Payment of utility bills on time like electricity, telephone bills and credit card bills and insurance premium will enhance your credit score. A good credit score denotes that you are credit worthy and the lender can be sure that you will repay his money on time and without fail. After all everyone is worried about their money.

A good credit score can even find you a house on lease or rent in a decent neighborhood. These three digit numbers act like “guardian angel” in a person’s life. The credit scores range from 300- 900. Anything above 700 is considered to be an excellent score. A 750+ score will fetch you reasonable interest rates with the lender. 450- 700 is fairly a good score and will also fetch you loans and mortgages. The interest may be slightly more than the 750+ category. Anything below 450 is considered to be not credit worthy. Late payments down the score drastically.

If you are a first timer to get a credit card or loan then it is very essential you have a good credit score. This gives the lender an idea about your credibility to repay his money. After all he is not taking any collateral from you. So the risk is his and to ensure that his money is in safe hands, the lender depends on the credit score. Experience has shown that borrowers with higher credit scores are less likely to default on a loan. It’s always wise to start with a student loan or pay more than 50% as down payment and take up a small loan to open your credit line. Always try to pay your bills and payments on time and Your credit scoring will gradually improve.