Understanding Credit Scores

For the last several years, creditors and financial institutions have been using credit scores rating as a means to determine the level of risk for the bank when a customer applies for a loan or credit card. In the recent past, the scores have been used to evaluate the ability of the customer to repay loans. As such, understanding credit rates have become important if you want to apply for a loan, be it home loan or personal loan.

Meaning of Credit Score
The first step is to know what credit score mean. It is nothing but information about a consumers credit experiences like outstanding debts, collection actions, types of accounts, bill paying history etc. This information is collected from one of the credit bureaus, namely Experian, Equifax, and TransUnion. Financial institutions use a statistical program to compare the information provided by the credit bureaus to determine the credit worthiness of consumers. Points are awarded for each factor which helps in predicting who is likely to pay. The total number of points collected is called the credit score. Usually, the range is between 300 to 850 points and a person having a higher number is considered to have a better score.

Importance of Credit Scores
Understanding credit ratings is important as it determines, if you would get a credit or loan and the rates which you would pay for loans and mortgages. Higher credit ratings means the chances of your getting loan or credit card at a lower rate of interest is high. In the recent past it has been found that, if you want to rent an apartment, you must have a good score or else the landlord may turn down your application. The scores may also be a deciding factor on the amount of deposit you need to pay for natural gas services, electricity or telephone. Even if you have to increase your credit limit or change the rate of interest you pay on your credit card, the credit rank is checked. A good record would make your financial dealings easier and you would be able to save a lot of money. As such, it's an essential part of your financial well-being.

Improving Credit Scores
Depending on the type of credit you are applying, credit score models differs. It is only the financial institution which can explain which model they use and how you can improve credit records. Usually, scoring models assess information like payment history, amount of outstanding debts, duration of credit history, credit applications in the recent past, types and numbers of credit accounts. Other factors like home ownership, length of employment and occupation or job are also taken into consideration.

If you want to improve your credit scores, it's best to pay bills on time, pay outstanding balances and avoid new debts. You would need some time so as to better your credit rating, but it's worth the effort.

Differing Credit Score
At times you as a consumer may find that your credit scores differ as the credit reporting agency changes. The main reason for this is the differing scoring models they use and the credit reports they receive. There are times when one reporting agency misses an account which either hinders or helps your ultimate score. So, before you apply for a mortgage or a credit card make sure that you get details of your record from all the credit rating agencies. Any discrepancies should be brought to the notice of the concerned credit bureaus for mistakes to be rectified.

Credit Score Range
Understanding credit scores range for all three credit bureaus is important. Each of the agencies uses numerous internal parameters for determining the final score. Whatever the parameters, your aim should be to improve your credit worthiness. The range followed by Experian is between 330 to 830 and for Equifax and TransUnion it's 300 to 850.

Good Credit Scores
For most consumers, the one question that perturbs them is with regards to credit scores that may be deemed ideal. So, what is a good credit score, after all? Well, when lenders take a look at your record, they usually go through the score prepared by Fair Isaac Corporation. Today, it is the most commonly used system to calculate credit scores. These scores are bought by the lenders from the three credit bureaus. Most lenders consider scores of more than 700, a sign of sound financial background. If the score is below 600, it means that you are a high risk customer and your application may be turned down or if accepted, would entail higher rates of interest.

Thus, understanding credit scores is essential for you to get a mortgage easily and that too, at a lower rate of interest.