Credit scoring is a system that lenders use to assess the creditworthiness of borrowers. It is a way of measuring the likelihood that a borrower will repay a loan on time and in full. Consequently, it is better to enroll in a debt relief program to avoid defaulting completely on your loan and ruining your credit score.
Before embarking on the tips to help you understand credit scoring, there are several important things you should know about credit scoring:
1. Credit scoring is not a static process — your credit score changes over time, depending on your credit history.
2. Credit scoring is not just about your credit history — factors such as your employment history and income can also impact your credit score.
3. Credit scoring is used by a variety of lenders, not just banks. This includes credit card companies, utility companies, and landlords.
4. There are different credit scoring models in use, so your score may vary depending on which model is used. Some main models are FICO® and VantageScore, with FICO being more valuable.
5. Your credit score is just one factor that lenders consider when making a lending decision. Other factors, such as your income and employment history, are also taken into account.
6. You can get your free credit score from several sources, including credit reporting agencies and some financial institutions.
7. You can improve your credit score by taking steps to improve your credit history, such as paying your bills on time and keeping your credit balances low.
What’s a credit score?
A credit score is a number that shows the creditworthiness of a borrower. The score ranges between 300 and 850. It is used to determine the credit risk, and it can also influence the interest rate that a lender offers. A good credit score indicates that an individual is likely to repay their debts, while a low credit score may indicate that an individual is a high-risk borrower.
A credit score of 670 to 739 or above is considered good — under the FICO scoring model — while a score of between 661 and 780 or above is considered good — under the VantageScore scoring model.
On the other hand, a score of between 300 and 579 is considered very poor — under the FICO scoring model — while a score of between 500 and 600 is considered poor and a score of 300 to 499 is considered very poor — under the VantageScore scoring model.
What does credit score affect?
Your credit score is important because lenders use it to determine whether to give you a loan. Landlords also use it to decide whether to rent to you. A low credit score can make it difficult to get a loan or rent an apartment. That is why it is crucial to maintain a good credit score by not defaulting.
Why does credit score change?
Several factors can impact your credit score, including your:
- Payment history
- Credit utilization
- Credit mix
Payment history is the most important factor in your credit score, and even one late payment can have a significant impact. Credit utilization is an important factor as well, and is determined by the amount of credit you’re using in relation to your credit limit.
Credit mix and inquiries are also considered when determining your credit score.
Credit mix refers to the types of credit you have, such as installment loans, revolving credit, and so on. Inquiries are the number of times lenders have accessed your credit report, and too many can indicate that you’re seeking new credit.
Skills to Improve Your Score
Below are a few tips to help you understand credit scoring and key skills to help you improve your score when on a credit card relief program.
- Making sure you keep track of all of your expenses and income so that you can accurately budget for your payments.
- Trying to pay off as much of your balance as possible each month to reduce your overall debt.
- Making sure you make all of your payments on time to avoid late fees and penalties.
By adhering to these simple tips, you can improve your score and get on the path to financial freedom.