Everything you need to know about credit score

A credit score analyses an individual’s financials and credit worthiness. Credit scores are typically based on a credit report by credit bureaus. Every individual should maintain their credit score. However, only some know the ins and outs of it. There are a lot of terminologies when it comes to credit scores, like credit reports, credit bureaus, and more. 

Usually, a credit score falls between 300 to 850, where 850 is the best. The higher the credit score, the better it is. An Individual’s entire financial life can be summed up with one number, and that is the credit score. The higher the credit score, the more trustworthy you will be considered by creditors. I will tell you the important facts about credit scores in this guide.

Credit score and Credit Report are different terms

A credit score is calculated from credit reports; however, they are two different things. A credit report of an individual is a thorough record of their credit history, including the bank accounts, how often the individual applies for credit, debt collection and public records, loan and credit cards, liens, and bankruptcies. 

A credit score is a factual summary of all these factors. If the accounts are delinquent, your credit score may go down automatically. For people with a strong payment history, their credit score will increase on the higher side. When you go for any lending, lenders majorly check your credit score; thus, it’s important to check your credit score regularly. Credit scores and credit reports are both kept by three credit bureaus for each individual.

Credit Score is based on Five factors

There are five different factors that influence a credit score. 

Payment record  

35% of your credit score out of the total depends on your payment history. So it is very important how fast or late you make payments as it accounts for one-third of your credit score.

Utilization of Credit 

30% of your credit score depends on how much available credit you are utilizing. Credit utilization for an individual should be less than 30% of the total limit available. This utilization should be considered across all cards in total. 

Age of credit accounts 

The average age of your credit accounts also matters. The older your accounts are, the best it is for your credit score. This accounts for 15% of the total credit score and shows the long-term relationship and responsible financial management. More than 10 years of relationship is considered excellent. 

Types of Account 

Revolving accounts like credit cards, car loans, and home loans show the lender that you can manage multiple debts. This contributes to 10% of the total credit score.

Inquiries 

Lenders generally inquire about your credit score when you apply for any credit, like a loan or credit card. The more inquiries there are, the credit score will be lower. However, this factor is the least to be considered and contributes 10% to the total credit score. 

Get your Score and Report for Free

Individuals can take a free credit report copy from any major credit bureaus – Equifax, Experian, and TransUnion. Individuals can check their credit report every 4 months. With the help of this report, individuals can catch discrepancies and have an overall picture of financials. Users can also get credit scores for free from various other places.

When you check your own, it won’t effect

Too many inquiries on the credit score affect it, and it falls. However, the effect is small and temporary. Also, if an individual checks their credit score, it will affect the score. This is one benefit for individuals. So when you are planning to take a loan and want to check if you are eligible, you can check your score at any of the bureaus.

Credit score has different ranges, and it’s defined differently

Every credit bureau, especially the 3 major ones, has its model of scoring with different credit score ranges. The score will change depending on which one you are looking at. It is equally important to know the range of scores you are looking at and not to rely on just one credit bureau’s score. The range of different credit bureau are classified as follows:

Experian: 360 – 840

Equifax: 280 – 850

Transunion: 300 – 850

VantageScore: 501 – 990

Credit Score can help identify fraud

Any individual who keeps an eye on their credit score and checks it every four months can find mistakes or fraud, if any, with their credit score. If you are getting to know that your credit score has been dropped and a new account or credit card you did not open or has a huge balance you need to be aware of, you can rectify and take action immediately. Sometimes a wrong entry or no entry also affects the credit score.

Credit Scores can cost a lot over a Lifetime

Individuals with a great credit score can get better terms on credit cards and loans considering the credit score. One of the major factors can be interest in credit cards or loans. Generally, when the credit score is lower, the higher the interest will be. Then you can pay thousands of extra amounts for a Lifetime—individuals who raise even a 100-point extra mean a great deal in terms of good financial management.

There is nothing called a Joint Credit Score

Senior citizens or married couples mostly go for joint accounts. People using add-on credit cards or sharing credit cards with an authorized user do not affect your credit score jointly. There is nothing called a joint credit score. For anything which is jointly operated, the score will be calculated in the primary holder’s account. So even if you share your credit card with anyone with a poor credit score, it will not affect your score. 

However, if the other person does not make the payments or keeps it stacking up, it will automatically affect your credit score. So whenever you share your credit, make sure who will be responsible for the payments.

Any Negative Information will automatically age off

Nobody is perfect, and mistakes are natural. We learn from mistakes. So do not worry if you do not have a great credit score history, as it will not affect your credit score long after the negative information ages off. As long as your credit score keeps moving and doing good, the past mistakes will be written off automatically and won’t be a major factor.

Credit Score is not the only factor considered for lending

Credit score indeed plays an important role when you ask for lending. However, there are other factors that creditors consider. Anyone with a no credit score, maybe the first timers or anyone with a poor credit score, can seek alternative lenders. In some situations, a guarantor or a personal appeal can also help. 

Personal appeal is usually more effective at smaller financial institutions or local banks and union credits, where the borrower can talk to the decision maker and try convincing the person with your financial picture and condition rather than just the credit score. 

Tips to Improve Credit score

There are different ways to improve your credit score. We have mentioned a few tips which you may consider for improving your credit score or keeping it maintained.

• When it is about credit score, paying all your bills, from credit cards to EMIs, on time is recommended for a good score.

• Total credit utilization should be less than 30% on average, as it affects 30% of the credit score. 

• As credit score is important, you can start building your credit score as early as possible. In the long run, the score becomes better. 

• Diversify your credit options and look for new ones. When there is no option other than a credit card, go for loans or a card with a fixed deposit. 

• New accounts also affect the credit score, so slow down on opening new accounts—only open the required accounts. Close the accounts which are of no use.

The Bottom Line

Credit score plays a vital role in every individual’s life. Credit cards, loans, and financial aspects depend on credit scores. Credit scores and credit reports are not the same things. A credit report is the report of all the financials in an individual’s life given by different credit bureaus. In this article, I have listed all the important terminologies and facts you should be aware of about credit scores.