The Credit Score and the Math Behind It

The Credit Score and the Math Behind It

Credit score is a valuable utility for lenders. This is a calculated by a report in tabular format which contains all your major financial transactions. Any payment defaults, failures in credit and loan accounts are clearly visible in this.

All this with other factors like, payment history, outstanding debt, length of credit sums up to make your credit score. Scores are generally between 300 and 850. Higher score means better credit.

To qualify for prime rates on home loans, auto loans, and credit cards the score should be typically above 680.

Payment history with creditors is important for potential lenders as they are curious to know how disciplined you have been in payments. Moreover, having too much debt can also negatively affect your score.

The Value of Credit Score

Creditors have various methods to evaluate an individual’s credit worthiness. To speed up the process, several lenders start by reviewing a credit score. To differentiate good applicants from the bad, they put a tag for a minimum score requirement. If your score falls below this requirement, it will be an immediate credit denial.

How Credit Score Will Affect You

– A good credit and high credit scores makes you eligible to easily secure loans and credit cards at very low interest rates. The rates on any loan from mortgages to credit cards are directly linked from your core. In addition, for those exciting deals like the zero percent car loans, you would need a great score as one of the qualification.
– Job applicants are being screened for good credit and today many employers are looking for credit histories to thin the herd of applicants they receive for job openings. This thought of checking an applicant’s credit is that if you cannot pay your bills on time or be financially responsible then it is possible that you will not make a very good employee.
– Auto Insurance is another area where your credit scores and credit history is very important. Auto insurance companies are looking at client’s scores to determine the applicable insurance rates. This is an area where we can see that to increase credit score is an imperative.

READ  How to get credit card with bad credit score

Tips to Increase Your Score

Credit score report provides creditors with a clear Risk-to-Reward ratio picture and help them arrive a decision to approve or reject your application. Follow these simple steps which can help you to increase your credit score

Timely payment: Any failure in the bill payments within the specified duration can adversely affect your score. Payment history takes up 35% from your total score so defaulting in payments penalizes the total score.
Keep them informed: Some of the creditors could grant you a grace period upon requested and you have made them aware of your current poor financial situation.
Use the plastic responsibly: Have a limit on the number of credit cards you possess and always keep track your expenses to avoid piling up more bills then you can repay. Keeping credit cards at their maximum limit can be harmful. Keep cards at about 25% of their maximum limit.
Reduce your outstanding debts: Debt contributes to 30% of scoring. Thus, the more debt you have, the lower your score. At this stage, you can also try to arrange a debt settlement negotiation with your creditor.