Credit scores help lenders decide how good a loan candidate you are for a loan. Scores are generated based on the information your credit report contains. Here are some credit score basics:
Types of Scores
Every individual has multiple credit scores. The most commonly used scoring model is FICO. However, there are various types of FICO scores as each of the three major credit bureaus (Experian, TransUnion, and Equifax) issues a different one.
Irrespective of the credit scoring model being used, the purpose of a credit score is to determine how likely you are to pay your bills on time. FICO scores are typically used for things like home and auto loans. Your FICO score consists of several components, including:
– Payment history (35%)
– Current debt (30%)
– Credit length (15%)
– Types of credit (10%)
– New credit (10%)
– For young people with no borrowing history, lenders check other payment histories, like rent and utility bills.
What Affects Credit Scores
It’s difficult to determine the exact impact the above activities have on credit scores. However, current debt and payment history comprise the majority of your score, which is why you must focus the most on doing well in these areas.
Any late payment you make stays on your credit report for seven years. If you miss making a payment on time, do your best to ensure it doesn’t happen again. The longer you go without making a late payment, the further your score improves.
How to Check Your Credit Score
You can get a free credit report once every year from each bureau. Checking your credit reports regularly is necessary to ensure it’s error-free. If there are any discrepancies, get them rectified immediately. However, your score isn’t a part of these credit reports.
To check your credit score, you can use mobile apps like Mint and CreditKarma. Many credit cards and banks also tell customers their scores for free. You can also find out your score from your lender when applying for a loan.
Your credit score is not the sole criterion that governs whether your loan application will be approved. Credit scores help lenders set standards to decide which borrowers qualify for loans.
To improve your credit score, you’ll have to change your habits to show that you’re a responsible borrower who’ll repay on time. Building credit scores is a time-consuming process, but it’s possible.