Credit Score Rats – Important things you need to know about Credit Score.
Credit scores are designed, to predict if consumers will pay their bills on time. It is important to have high credit score to have maximum financial freedom.
The Credit Score Rats are:
300 – 559 → Poor
560 – 659 → Fair
660 – 724 → Good
725 – 759 → Very Good
760 – 900 → Excellent
What’s my credit score used for?
Your credit score is used by lenders, banks, and other financial institutions to determine your creditworthiness and ability to repay a loan or credit card debt. A credit score is a three-digit number calculated based on your credit history, including your payment history, outstanding debt, length of credit history, types of credit used, and new credit inquiries.
When you apply for a loan, credit card, or mortgage, lenders will often check your credit score to assess the level of risk you present as a borrower. The higher your credit score, the more likely you are to be approved for credit, and you may also be offered lower interest rates and better loan terms.
Your credit score can also be used by landlords, employers, and insurance companies to assess your reliability and trustworthiness, although this is less common. Overall, having a good credit score can help you qualify for better credit and financial opportunities, while a low credit score can make it harder to get approved for loans and credit cards or result in higher interest rates and fees.
What credit score report contain?
A credit score report typically contains information about an individual’s credit history and financial behavior, including:
Personal information: This includes the person’s name, address, date of birth, and Social Security number.
Credit accounts: This includes all the credit accounts the person has opened, such as credit cards, loans, and mortgages. The report will show the current balance, payment history, and the status of the account.
Credit inquiries: This includes a list of all the companies that have requested the person’s credit report within a certain period of time. Too many inquiries can negatively affect a person’s credit score.
Public records: This includes any bankruptcies, foreclosures, or judgments that have been filed against the person.
Collections: This includes any outstanding debts that have been sent to a collection agency.
Credit utilization: This is the amount of credit a person is using compared to the total amount of credit available to them. A high utilization rate can negatively affect a person’s credit score.
Payment history: This includes information on whether the person has paid their bills on time or if they have missed payments.
All of this information is used to calculate a person’s credit score, which is a numerical representation of their creditworthiness.
How is credit score is calculated
Credit score is calculated using a mathematical algorithm that analyzes information from a person’s credit report.
Here are the key factors that determine your credit score:
Payment history (35%): This is the most important factor that determines your credit score. It reflects whether you have made payments on time or have missed payments or defaulted on loans.
Credit utilization (30%): This refers to the amount of credit you are currently using compared to the amount of credit you have available. It is recommended to use less than 30% of your available credit to maintain a good credit score.
Credit Utilization Ratio is the amount of credit you’re currently using compared to the total amount of credit available to you. It is an important factor in determining your credit score, as lenders use it to assess your creditworthiness and how likely you are to pay back your debts.
To calculate your credit utilization ratio, you need to divide the total amount of credit you’re currently using by your total credit limit. For example, if you have a credit card with a $5,000 limit and your current balance is $1,000, your credit utilization ratio would be 20% ($1,000 ÷ $5,000).
It is generally recommended to keep your credit utilization ratio below 30% to maintain a good credit score. Higher credit utilization ratios can signal to lenders that you may be at risk of defaulting on your debts or may be financially overextended. Therefore, it’s important to monitor your credit utilization ratio and keep it as low as possible.
Length of credit history (15%): This factor looks at how long you have had credit accounts open. The longer your credit history, the better it is for your score.
Types of credit used (10%): This factor considers the types of credit accounts you have, such as credit cards, car loans, student loans, and mortgages. Having a mix of credit types can be beneficial for your credit score.
Recent credit inquiries (10%): This factor looks at how often you apply for credit. Too many credit inquiries in a short period of time can have a negative impact on your score.
It is important to note that not all credit scoring models use these exact weights for each factor. However, these factors generally have the greatest influence on a credit score.
How long dose information and bad records stay in the credit score
The length of time that information and bad records stay on your credit report depends on the type of information and the credit bureau’s reporting policies.
In general, negative information such as late payments, collections, and charge-offs can stay on your credit report for up to seven years from the date of the first delinquency.
Positive information, such as on-time payments and accounts in good standing, can remain on your credit report indefinitely.
It’s important to note that different credit bureaus may have different policies for how long they report certain information. It’s a good idea to check your credit report regularly to ensure that the information being reported is accurate and up-to-date.
Bankruptcy : The length of time that bankruptcy information stays on a credit score record depends on the type of bankruptcy filed.
If an individual files for Chapter 7 bankruptcy, which involves liquidation of assets to pay off creditors, the bankruptcy information will stay on their credit report for 10 years from the date of filing.
If an individual files for Chapter 13 bankruptcy, which involves a repayment plan to pay off creditors, the bankruptcy information will stay on their credit report for 7 years from the date of filing.
It is important to note that bankruptcy is considered a very negative item on a credit report, and it can have a significant impact on an individual’s credit score and their ability to obtain credit in the future.
How can individual fix and improve his credit score?
There are several steps an individual can take to fix and improve their credit score:
Check your credit report: The first step is to obtain a copy of your credit report from one or more of the credit bureaus in Canada (Equifax and TransUnion). Review the report for errors or fraudulent activity and dispute any inaccuracies.
Pay bills on time: Your payment history is the most significant factor that affects your credit score. Make sure to pay all your bills on time, including credit card payments, loan payments, and utility bills.
Reduce your credit utilization: Keep your credit utilization ratio below 30% by paying off your credit card balances in full or making additional payments to reduce your balance.
Increase your credit limit: If your credit utilization ratio is high, consider requesting a higher credit limit. However, be cautious not to overspend and maintain a low utilization ratio.
Build a good credit history: If you have limited credit history, consider opening a credit card account or a small loan and paying it off on time to establish a positive credit history.
Avoid new credit inquiries: Limit new credit applications as each application generates a hard inquiry that can temporarily lower your credit score.
Monitor your credit score: Regularly monitoring your credit score and report can help you identify any changes or errors and take appropriate action to fix them.
It is essential to be patient as improving your credit score can take time. By following these steps consistently, you can gradually improve your credit score and maintain good financial health.