Not many people understand how credit scores are calculated, what qualifies one for a good credit score or a bad one. Mostly we simply accept what the report says without really understanding the reason for the rating awarded to us.
The credit bureaus have a well defined guideline that is used to award credit scores. This structure considers five key factors when calculating credit scores. These factors have different weighting with some having a greater impact than others. Working towards a score of 100% each contributes a certain percentage as follows.
1.Payment History 35%
2.Outstanding Balances 30%
3.Duration of Credit History 15%
4.New Credit 10%
5.Types of credit 10%
Payment history looks at whether you have been meeting your financial obligations on time and in full. This is the single most significant factor that will either make or break your credit score. Strive to always make payments on time and in full to maintain and improve your credit rating.
Outstanding balances constitute of what amounts you owe. It is the second most significant factor and can be managed by refraining from accumulating unnecessary debt.
The duration of credit history is the one factor you really do not have control over as it can only be improved by time.
New credit considers the applications you have placed for new lines of credit that are actually approved. It works well for you to have your applications approved since it shows that creditors have financial confidence in you.
Types of credit consider the various kinds of credit that you have been able to access. If creditors in various sectors and fields consider you worthy, then you will gain a higher rating.
Credit scores will usually be presented in the form of a number, the higher the number the better you credit score. A score that is above 700 is great. However if you are looking for excellence then the figure is 750 or anything above that. This is what you should work towards by keeping in mind the factors that have been indicated above. Having a credit score above 750 will afford you cheap credit and will also mean a much simpler process as creditors can see that you are able to competently handle your finances. 660 is however the cut off for anything that will be considered as a good score. Going below this figure will see you pay higher interest and also have a harder time in convincing creditors to lend you their money.
Your credit score is what creditors use to evaluate credit worthiness and has a big impact on the kind of deal you will be offered by financial institutions. Having a good credit scores allow you room to negotiate better terms with those who are offering financing. It is not difficult to understand credit scores or interpret the credit report as long as you know what to out for and what influences credit ratings.