Have you ever wondered what your credit score means?
Your credit score (or FICO score) is a numerical summary taken from the information in your credit report, which is calculated using a formula taken from all three credit reporting bureaus.
The formula takes into account various factors, which include:
• your repayment history or credit performance
• your current debt levels
• the types of credit you use
• your length of credit history
• any new credit you’re trying to apply for or have applied for in the past 12 months.
What Does Your Credit Score Mean?
The highest possible credit score a person can receive is 850 with the lowest score being 300 – although the median in America is around 720.
When assessing your suitability for a loan, lenders will look at your credit score. This gives them an idea about your past history with repaying money and helps them to assess your ‘risk factor’.
The way banks see it, the lower your credit score the higher your risk factor in their eyes. A low credit score tells them you have a history of bad repayments with other creditors. Of course if you’re considered a high risk borrower then banks tend to opt for a “rate-for-risk” approach when it comes to determining what interest rates you’ll be charged. If your bank sees you as a high-risk borrower, then you’ll probably receive higher interest charges as a result.
The same is true in reverse too. Those people with high credit scores are likely to be offered the best interest rates. Banks view people with high credit scores as ‘low risk’ as it shows they already have good repayment history. Banks are willing to reward people with a good credit score as they are likely to remain good clients and pay their bills on time.
Factors Affecting Your Credit Score
Most people know your credit score is affected by late payments on bills. Delinquent accounts, payments over 30 days late, any accounts turned over to a credit agency or collection and bankruptcies are shown on your credit report and your credit score is reduced accordingly.
But your score could also be affected negatively if your credit report shows a higher than normal amount of ‘hard’ credit applications in the past 12 months. Hard inquiries are those generated every time a lender or company accesses your credit report for the purpose of extending credit. The more times you apply for credit in a 12 month period, the more negative effect it can have on your overall credit score.
Another thing that can really reduce your score is high levels of available debt. Even if you pay down the balance to zero on all your credit cards each month, just having high limits available is taken into account. Banks will add up the total amount of available credit and this figure is enough to drop your total credit score.
Improving Your Credit Score – Little Things
The first obvious fix would be to have any errors removed. Sometimes information gets mixed up. If your credit report shows any errors, you have the right to dispute these. Companies have 30 days to respond to any challenges you have.
Another easy step you can take is to increase your payment frequency. Divide your monthly payment by 4 and pay that amount weekly. This can help the lender see you’re serious about keeping things on time and they’ll report this to the bureaus. Do this with as many bills as you can. It not only helps you to budget more effectively, but it helps to keep payments on time and regular.
Round up your repayments to the nearest $5. There’s no point paying a bill for $98.12 when you can round it up to the nearest $5 – which would make that payment $100. That extra repayment is not going to break your budget, but it will show a lender that you’re paying more than you need to, helping to improve your score again.
If you have any credit cards with a zero balance, keep one favorite and close out the others. Reduce your available credit limits to only what you might need for emergencies. Remember – banks frown on large credit limits.
Improving Your Credit Score – Big Things
Despite those late-night infomercials telling you how easy it is to fix your credit, there are some things that just can’t be fixed easily.
Be aware that some things can’t be removed until that information is true and correct – and that can take time!
Court judgments, liens and wage garnishments remain on your credit report until you’ve amended that entire overdue balance. Even then, the information may remain on your report for some time after you’ve cleared the account.
A bankruptcy might seem like the easy way out of a situation at the time, but it takes 10 years for a bankruptcy to be removed from your credit report. If you honestly think you won’t need any credit at all for the next 10 years, then go ahead and give this avenue a shot. The truth is bankruptcy really should be a last resort only and there are other things you can do prior to taking this drastic step.
The easiest way out is to avoid bankruptcy if at all possible. Work out alternative solutions with your creditors and find a way through your credit problems. Ring and negotiate a payment plan. Then stick to that plan. It won’t be easy – but it’s a whole lot easier in the long run than a bankruptcy.
You’ll be grateful in the future when your credit is only marginally affected.
The best solution of all is to avoid credit problems in the first place. Don’t be afraid to speak to your lender and make arrangements if you think you’re going to be late with a payment.