At some point in your life credit will play a big role in how companies view your worthiness. It is this credit data that helped coin the phrase credit worthiness. For companies that have a service to offer, think of your credit score as a trusted reference for all parties involved. Without it, you’re asking people to take a complete leap of faith with a complete stranger. Understanding your credit score will bring you much closer to getting it at an acceptable level. By knowing what makes it tick, you can fine-tune credit scores so that it is always at an optimal level.
A credit score ranges from 300-850 as a metric to estimate risk for the borrower. A low score is likely to not make payments on time while a high score has a track record of always paying on time. It isn’t a perfect system, but it is foolproof enough to keep lenders from taking a big risk. Here is a breakdown of scores by their upper limits;
So in short, anything between 670-740 would be good while anything under 580 would be poor. On average, it is always a good idea to be in the fair or higher range if you are looking for help from a lender. Some employers will even disqualify you from work if your credit score is too low. Aiming for the very good/exceptional range, is great, but not always necessary. After a certain point in the scoring cycle the only thing that is affected is the amount of the interest payment.
The three credit bureaus are Equifax, Experian and TransUnion. Each calculate your credit score with their own algorithms, although they still break them down using five things; payment history, length of credit, amount owed, new credit and types of credit. The two most important out of all of those is payment history and amount owed. Payment history counts for 35% of your credit score while amount owed is 30%. That is a whopping 65% of your credit score tied up in two things, so imagine what happens when both are bad. You get to check your credit for free once each year from each of the three credit bureaus, with optional advanced reports available for a small fee. Other programs can give you similar services but vary in their length, scope and money required.
The amount you owe is the second biggest chunk of your credit score but is easy to remedy. The only thing you have to do is pay the money you owe. Make sure that if you’re paying to a collection agency to get proof of payment. They report to the big three and directly affect your score. The reason amount owed is so important is because it is the easiest to manipulate. Your payment history is the track record, showing your responsibility when it comes to keeping up with payments. A bad payment history can’t be fixed and will take years to fall off your credit report. Amount owed can be fixed quickly, and will show on your credit score in less than thirty days.
Don’t ring the bell of doom just because your credit score is low. By understanding the breakdown of your score, it puts you ahead of millions of other people. Credit scores change all the time and should be monitored on a consistent basis. By following through with your obligations it will continue to rise instead of fall.