Everything you need to know about credit score

Business

Buying a house, a car or getting started in a college is a dream for lots of people. Sometimes, to realize these dreams, you will need to get credit from your bank, a way to get financial support from the institution and buy what you need to.

The lend you will get depends on your credit score, a punctuation given by banks that show the consumer credit worthiness. It is based on the bank’s confidence with the client, so it can take a while for anyone to get credit score — and, consequently, credit for buying things.

Let’s take a look at everything you need to know about credit score!

What is a credit score?

Credit score is a punctuation between 300 and 850 given by banks to depict a client’s credit worthiness. It functions in a simple way: the higher the credit score, the more trustful the client looks to the bank, increasing the possibility of the financial institution lending money to them.

When you have a high credit score, the bank believes that the probability of you paying the loans in a timely manner is bigger than someone that has a lower credit score.

In short, the credit score is the key to banks to decide if they are going to lend money to someone or not.

The credit score is based on what?

The credit score is based on the credit history of the person: the number of bank accounts that were opened by them, the payment history and the total level of debts that an individual has.

This punctuation is used by many financial institutions; so, if you have an open account in a bank, the other ones will know about it.

Who created the credit score model?

It was created by the Fair Isaac Corporation — also known as FICO. There are other models of credit score, but this one is the most used around the United States.

How does it work?

As you already saw, a credit score can influence many aspects of your financial life, because it is something that directly influences the decision of a lender to lend you money.

If someone has a credit score below 670, they are considered subprime borrowers — considered a higher risk for a lender. A credit score equal or above 700 is considered a good one, and scores higher than 800 are considered excellent.

How is the credit score calculated?

Experian, Equifax and Transunion are the three major reporting agencies in the USA that reports, updates and stores consumer’s credit histories.

Their calculation is made by these main five factors: payment history — that corresponds to 35% of a credit score —, total amount owed, length of credit history, types of credit and new credit.

How to improve your credit score?

If you are thinking about buying a house or renting an apartment and need to improve your credit score, there are some things that you can do to have a higher credit.

The first one is pay your bills on time: a half dozen months of payment done on time can show a difference on your score. Asking for financial institutions to increase your credit is also a good idea, but do not spend the new credit; while it is useful to have a bigger credit, it is important to keep a lower credit utilization rate.

Also, follow the same logic and avoid closing your credit card account: it is better to stop using it, since closing your account can decrease your credit score.

Finally, keep a financial control of your expenses and earnings. This can help you to not delay your bills, spend more than you should and invest in the right things.

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