The Science of Credit Scores: How They Work and How to Improve Them
Credit scores are all-important in the modern world. Credit scores can make or break your chances at getting a loan, a credit card, a mortgage, or even a job. Yet many of us don’t understand how credit scores are calculated or how to improve them.
In this article, we’ll unravel the mystery behind credit scores, how they work, and tips and strategies to help improve your credit score.
What Is A Credit Score?
A credit score is a three-digit number from 300 to 850 that represents your perceived credit risk based on your credit history and other factors.
The score is calculated using various points from your credit history, such as the amount of debt you have, the age of your accounts, any past delinquencies, and the types of accounts you have. It’s like a report card of sorts for all of your financial decisions – it tells lenders whether or not you have a good history of paying your bills and being financially responsible.
It’s important to understand that a credit score doesn’t measure your creditworthiness; instead, it assesses the likelihood that you will be able to repay a loan.
Types of Credit Scores
There are several different types of credit scores, including:
•FICO: This is the most widely used credit score and is based on the Fair Isaac Corporation’s model. It looks at five factors to calculate your score: payment history (35%), amount owed (30%), length of credit history (15%), new credit (10%), and types of credit (10%). The higher your credit score, the better your credit rating.
•VantageScore: This score was developed jointly by the three major credit bureaus (Equifax, Experian, and TransUnion). It looks at similar criteria as the FICO score but with a different point system and criteria. VantageScore uses a scale of 501 to 990, with higher scores indicating a greater creditworthiness.
•TransUnion New Account Score: This score was developed specifically for TransUnion and looks at your credit history and other credit-related factors to determine your risk of defaulting on a credit account.
How to Improve Your Credit Score
Having a good credit score positively impacts practically everything in your financial life. It can mean the difference between getting approved for a loan, receiving a favorable interest rate, or even securing a new job.
Fortunately, there are several ways to improve your credit score. Here are a few tips and strategies:
Pay Your Bills On Time: Your payment history is the most important factor when it comes to your credit score, so always make sure you pay your bills on time. This includes credit cards, loans, telephone bills, and utility bills.
Pay Down Debt:
If you have a lot of debt, it can lower your credit score. To boost your credit score, try to reduce your debt as much as possible. Start by paying off any accounts with high interest rates first and make sure you’re paying more than the minimum amount due.
Monitor Your Credit Report:
It’s important to stay on top of your credit report to make sure there isn’t any false or inaccurate information. Request your credit report from all three major credit bureaus (Equifax, Experian, and TransUnion) at least once a year so you know where you stand.
Avoid Opening Too Many Credit Accounts:
Applying for credit too often can hurt your credit score, so take your time and be selective when it comes to opening new accounts. Make sure you only use credit when necessary.
Keep Old Accounts Open:
Closing high credit limit accounts can negatively impact your credit score by reducing your overall credit limit, so it’s best to keep these old accounts open and just make sure the balance is zero.
Keep Your Balances Low:
If you have a high amount of debt, your credit score will take a hit. To improve your credit score, try to keep your balances low and manageable.
Understanding credit scores and how they work is a crucial part of managing your finances. With the right strategies, you can take control of your credit score and make sure it’s in good shape.
By following the tips outlined in this article, you can work toward improving your credit score. With diligence and a bit of patience, you’ll be well on your way to a higher credit score and better financial freedom.