Credit score is one of the most important fiscal numbers for a majority of Americans. It determines whether we are eligible to buy a house or a car, and also the interest that we will be charged for it. Credit score is computed by several companies, but the most prominent agencies are Fair Isaac Corporation (FICO) and VantageScore. These companies calculate the credit score of an individual by taking a look at his credit report, and after weighing in all the parameters, they come up with a score that is reflective of the individual's credit history.
Although FICO does not divulge the details of how it calculates credit scores, some factors that are taken into consideration are,
- Payment History: 35% of the total score is assigned to an individual's payment history - whether he has made payments on time, and how many times has he defaulted on his loans.
- Amount Owed/Credit Available: The amount an individual owes to the lenders, and his credit utilization is assigned 30% of the total score.
- Length of Credit History: 15% of the total score is assigned to the duration of your credit history. Longer the credit history, better the chances of getting a good score.
- If an individual has recently opened or applied for a new credit item, chances are that it may hamper his credit score. Lenders are more willing to establish credit with a person who has no or minimum obligations to other lenders. While computing the credit score, 10% of total score is assigned to this factor.
- The remaining 10% is assigned to the types of loans that a consumer has. Spreading the credit over a few sectors, such as mortgage, car loans, credit cards, etc., can increase the credit score.
Although there is a lot of ambiguity on what a good credit score really is, most experts are of the opinion that a FICO score of over 680 is considered good by most creditors. People with a credit score of less than 680 need to pay relatively higher interest rates. The table below, will give you detailed information about the categorization of credit scores according to FICO. The range of FICO score is between 300 and 850, and a majority of credit scores fall within the range of 650 - 700.
| Score | Description |
| 800 - 850 | Exceedingly Good |
| 750 - 799 | Super |
| 700 - 749 | Really Good |
| 650 - 699 | Good/Average |
| 600 - 649 | Fair |
| 550 - 599 | Poor |
| 500 - 549 | Very Poor |
| 300 - 499 | Terribly Poor |
VantageScore Scale
Apart from FICO, another reputed credit rating company that lenders consult is VantageScore. VantageScore was started in 2006 by three major credit bureaus - Equifax, Experian, and TransUnion. VantageScore uses the following parameters to calculate the creditworthiness of an individual.
- Payment history - 32%
- Utilization - 23%
- Balances - 15%
- Depth of Credit - 13%
- Recent Credit - 10%
- Available Credit - 7%
| VantageScore | Grade/Rating |
| 901 - 990 | A/Super Prime |
| 801 - 900 | B/Prime Plus |
| 701 - 800 | C/Prime |
| 601 - 700 | D/Non-Prime |
| 501 - 600 | F/High Risk |
Grade B or Prime Plus is considered good rating as far as VantageScore is concerned. It ensures that consumers get good deals from creditors.
One notable difference between FICO and VantageScore is that the latter lays more emphasis on the last 24 months of activity on a consumer's credit report. This is good for people who might have a poor credit report in the past, but have taken corrective steps to improve their credit score in the last two years.
Tips for Improving Your Credit Score
- Pay your bills on time. We know it is easier said than done, but delayed payments will hurt your credit score the most. Keep a track of the payments that are scheduled on particular dates/days. Set up automatic payments from banks, but do it only if you have sufficient balance in your account, otherwise be prepared to pay overdraft fees. There will be times when due to an emergency, you may not be able to pay the bills on the stipulated date. In such scenarios, it is advised that you contact your creditor and make him aware about your situation. This will prevent any bad remarks on your credit report.
- Credit card debt has become ubiquitous in America, and is one of the major contributors to a low credit score. Having fewer credit cards can help you in allocating funds to make the required monthly payments. Transferring your balances from one card to another leads to bad credit reporting. As we mentioned earlier, credit availability is a factor that most credit rating agencies look at, so it is important that you do not overshoot your debt-to-credit ratio. New credit inquires and applications are seen as signs of high risk by credit rating agencies and can further lower your credit score.
- It is important that you get copies of your credit report and check whether all the information has been correctly entered. Credit rating agencies have a large database of consumers which can sometimes lead to mistakes on their part. As a consumer, it is in your interest to check your credit report thoroughly and rectify the errors, if any.
Having a good credit score is extremely important in today's times, when a majority of transactions are done by establishing a credit. We hope that the information presented in this article will be beneficial to you.
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