Most judgments come from things like the way a person acts or communicates with others. You can make judgments on the way someone talks, dresses, or behaves. The thing about this type of judgment is that it is totally subjective and a matter of opinion.
When it comes to financial matters though, a matter of opinion isn’t a secure form of insurance. Anything that involves a financial commitment like a loan, credit card, or auto finance has to come with guarantees. If banks, credit card companies and other lenders based their decisions on opinions and faith, they’d probably go out of business pretty quickly. So how do institutions like these make safe judgments about loaning money and giving credit? The answer is a credit score.
What is Your Credit Score?
Your credit score is a three digit number that is calculated using information from different reporting institutions. Most institutions that you make a financial commitment with report data about the types of accounts you have, the balance of these accounts, and your payment frequency. While there are many different ways of measuring credit scores, the FICO system is by far the most popular and used by 90% of financial lenders. Your scores are followed and calculated by three different reporting agencies.
The numerical score from each agency may vary, but they are usually within the same range.
These scores are formulated by looking at five factors
- Payment History
- Amount Owed
- New Credit
- Types of Credit
- Length of Credit History
Your credit score with each of these agencies falls within a range between 300 and 850. The higher end of the range represents those who are perceived as a secure borrower. These numbers tell lenders that you have an established history of maintaining and paying all accounts in a timely manner. Here is how these ranges breakdown into categories.
720-850 Excellent – These individuals enjoy lower interest rates and repayment terms on different types of loans. Scores in this range can entitle individuals to credit cards that offer a variety of exclusive member benefits.
680-719 Good – This range allows decent terms on loans and financing options. Taking out or refinancing large loans like that for an automobile or home is easier in this category, though lacks some of the perks of the Excellent range.
620-679 Average – This range represents the lower end of the spectrum when it comes to getting fare interest rates and borrowing terms. While you are still likely to secure financing and credit in this range, it usually comes with higher interest and payments. You may also have to attempt to secure financing from several different institutions before getting approved.
580-619 Poor – This range still allows you to get approved for loans and establish credit accounts. However these approvals are usually based on the terms of the financial institution and offer little to no perks to borrower and offer them no options.
500-579 Bad – This range usually causes interest rates to double or triple that of individuals in the Good range. Repayment terms will be very strict and you may end up paying more in interest than your actual principal payment.
Under 500 – This range usually is unable to secure any type of loan or financing. Individuals within this range typically must undergo some type of professional financial restructuring.
Rebuilding and Restructure
The good news is that if your credit falls anywhere below the 720 range, there is room for improvement. Scores can fluctuate over a person’s lifetime. There are some valuable methods to raise your credit score.
- Using a credit card – If you have a credit card with available credit you can make several purchases to establish a balance. Assure that each month you pay the billed payment amount on or before the due date. While it may be tempting to pay the balance in full, it is better to make individual payments to show you can commit to making a monthly installment on time. A one-time payment in full does not provide a history like individual payments do.
- Check with your bank – Most major banks will offer different options for their customers to build credit. Talk to a banker and they may be able to give you options like credit building loans or establishing a credit account.
- Assure all accounts are paid on time – If you are financing a car or have a home loan, then making payment on or before the due date will reflect well on your credit. Showing you can keep up with the payments on large loans like this reflects well on credit reports.
- Review and critique your report – There is a chance that former debits are still listed on your report or closed accounts linger as open and active. These items do you no favors. If you find paid debits are still listed, contact the institution and ask if they can remove the information. If they refuse or you are unable to, then contact the credit agency and file a dispute. Also items may be listed or reported inaccurately. Commonalties like names or similar social security numbers may lead to inaccurate reports that negatively impact your score.