Your credit score can predetermine your financial stability in the future. If you want to buy a house, a car, a computer or borrow money to cover your tuition at the university you would need to rely on your credit rating. Your credit score is a three digit figure that allows you to get a loan with high or low interest.
You may wonder how can a number rule over your life and determine your future. If you don’t know how Credit Reports System works you would get confused. Credit rating relies on a history of your financial activity, such as the amount of open credit, unpaid bills, and many other things that affects your creditworthiness.
Credit score allows lenders to evaluate the borrowers and estimate how likely the borrower will return the money and pay the interest on time. It is impossible to get short term loans, instant credit or a mortgage without these simple three digits.
FICO method
These numbers were previously hidden from the borrowers. Only lenders and other credit organizations were allowed to access this data. Fair Isaac and Company have developed the score to evaluate customers. The company believed that this information would be confusing for the customers. Many people didn’t have any idea of what the banks and other lenders were expecting from the customers.
In 2001 the U.S. Congress put pressure on credit organizations to give this information to the public. Now you can request your credit report from credit reporting agencies.
Credit organizations simply take various financial indicators, such as your credit report to establish the score. It ranges from 300 to 850. Below you will find an approximation of how it is calculated:
35% of your indicator depends on your financial history. All the bills you forgot to pay or paid late will affect your rating. The lenders would like to know if you pay your bills on time. You rating won’t suffer if you were late with the payment for one bill 10 years ago. To the contrary, if you were late with your payments recently, your rating will suffer.
Another 30% take into consideration your outstanding debt. First of all, lenders will notice if you still need to repay your car loan or any short term loan. If you have a lot of credit cards at the limit, your credit score will be lower. Your card balance shouldn’t exceed the 25% limit.
15% is based on your overall history. If you have a long credit history, you will have a better credit score rating. The lenders will simply have more information about your financial activity to predict your future behavior and calculate the risks.
10% depends on the recent credit history. Think twice before you decide to open a new credit account as it will negatively impact your credit score for a short time.
Final 10% accounts for the amount of credit you already have. If you know how to deal with different types of credit accounts (i.e. installment loans and payday loans) your creditworthiness will improve.