A Basic Guide To Understanding How Your Credit Score Works

A good credit score can make life easier for you. For one, financial institutions with the funding you need base their decisions on your credit score. It’s basic yet reliable proof of how likely you are to pay off a loan.  

Your credit score is one of the deciding factors for whether or not to approve your loan. It also helps lenders determine the best offers they can give you.  


Why Credit Scores?  

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The Fair Credit Reporting Act had set which information is allowed to be collected from the borrowers in 1970. Since then, credit bureaus are using credit scores because it was faster and easier to use than to read compiled reports on lenders.   

Today, consumers are encouraged to maintain the best credit utilization ratio, not exceeding 30% of their available credit. Unused credit accounts for the benefit of your credit score. You can keep the rate low by paying off credit balances and updating payments.  


What Is Considered A Good Credit Score? 

Credit scores work partially by making use of scoring models. Banks, credit unions, and other lending companies use these scores to decide if they will approve your request for a loan. Scoring models usually rate from 300, which is very poor, up to excellent, 850. Scores are calculated based on the scoring model and the credit bureau.  

The FICO credit scoring model makes use of the following ranges: 300 – 579 (very poor); 580 – 669 (fair); 670 – 739 (good); 740 – 799 (very good); and 800 – 850 (excellent).  

Vantage Score, however, uses a different range: 300 – 499 (very poor); 500 – 600 (poor); 601 – 660 (fair); 661 – 780 (good); and 781 – 850 (excellent).  

The average credit score, as of 2019, is 706 by FICO and 682 by VantageScore. 

If you’re in the middle of loan approval, your lender will be checking various credit union scores using either FICO or VantageScore. There’s no telling which one they’ll prefer, so it’ll help to keep paying off loans to maintain a good credit score.  


How Your Credit Score Is Calculated 

There are currently three major credit bureaus (Experian, TransUnion, and Equifax) in the United States, and they use lender information to calculate scores. Each bureau and credit scores are calculated using scoring agencies such as FICO and VantageScore: 

Let’s take FICO, for example. It has significant factors where the scores are based on the following: payment history, which makes up 35% of the results; current debt; length of credit; new credit, and types of credit. The scoring agencies utilize these factors to calculate your scores.   

Banks and other financial institutions also play a vital role in collecting and sharing such information to help credit bureaus determine consumer behavior. If you have existing loans with any lender, they report on your activity, whether you paid or not, to bureaus.  

Institutions and bureaus are kept in the loop and have access to information that they can pull up every time you apply for credit.  


How To Check Your Credit Score 

Credit scores have a heavy impact on loan approvals. If you have a good score, you get a high chance of getting the funding you need. However, if you’ve used a fraction of available credit in the past, you might as well check your score to see your status. Checking your credit score won’t affect your credit if you know where to access it for free. Credit card issuers and other banking institutions such as Chase, Capital One, Citi, and Discover will help provide free scores in minutes when you log onto their websites.  

Once you get a good look at your score, you can decide to repair your score first. You can enlist help from any of the best credit repair companies today for a fee. They will attempt to have damaging information removed from your credit report, and it’s considered legal in most states. It would be better first to check if your state allows this kind of service.  


In Conclusion 

Financial companies use a credit score as a deciding factor for if you can be entrusted with the funding they provide. Your credit score is assessed along with other factors such as your payment history and current debt, which account for two-thirds of your score. Credit bureaus use two types of scoring models that financial institutions can look into, FICO and VantageScore. Information on American consumers are shared among the involved parties to help them quickly make decisions. This is why keeping your score on the right side is very important.  

Steven Millstein

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