There are many misconceptions about how to increase a credit score out there. There are customers who believe that they don’t have a credit score and many customers who think that their credit scores just don’t really matter.
These sorts of misconceptions can hurt your chances of securing a job, at good interest rates, and even your chances of getting some apartments.
Your Credit Score/Rating Is Your Most Important Asset
The truth is, if you have bills and a bank account, then you have a credit score, and your credit score matters more than you might think. Your credit score may be called many things, including a credit risk rating, a FICO score, a credit rating, a FICO rating, or a credit risk score.
All these terms refer to the same thing: the three-digit number that lets lenders get an idea of how likely you are to repay your bills.
Every time you apply for credit, apply for a job that requires you to handle money, or even apply for some more exclusive types of apartment living, your credit score is checked.
Your Past Credit Behavior Is Reflected In Your Credit Score
In fact, your credit score can be checked by anyone with a legitimate business need to do so. Your credit score is based on your past financial responsibilities and past payments and credit, and it provides potential lenders with a quick snapshot of your current financial state and past repayment habits.
In other words, your credit score lets lenders know quickly how much of a credit risk you are. Based on this credit score, lenders decide whether to trust you financially – and give you better rates when you apply for a loan.
You May Miss Out On That Dream Apartment,With A Low Credit Score
Apartment managers can use your credit score to decide whether you can be trusted to pay your rent on time. Employers can use your credit score to decide whether you can be trusted in a high-responsibility job that requires you to handle money.
The problem with credit scores is that there is quite a bit of misinformation circulated about, especially through some less than scrupulous companies who claim they can help you with your credit report and credit score – for a cost, of course.
From advertisements and suspect claims, customers sometimes come away with the idea that in order to boost their credit score, they have to pay money to a company or leave credit repair in the hands of so-called “experts.”
Nothing could be further from the truth. It is perfectly possible to pay down debts and boost your credit on your own, with no expensive help whatsoever.
What Is A Credit Score
Before you start boosting your credit score, you need to know the basics. You need to know what a credit score is, how it is developed, and why it is important to you in your everyday life.
Lenders certainly know what sort of information they can get from a credit score, but knowing this information yourself can help you better see how your everyday financial decisions impact the financial picture lenders get of you through your credit score.
A few simple tips are all you need to know to understand the basic principles:
What Is A Credit Score Created From?
If you are going to improve your credit score, then logic has it that you must understand what your credit score is and how it works.
Without this information, you won’t be able to very effectively improve your score because you won’t understand how the things you do in daily life affect your score.
If you don’t understand how your credit score works, you will also be at the mercy of any company that tries to tell you how you can improve your score – on their terms and at their price.
Credit Scores Below 600 Are Seen As A Risk
In general, your credit score is a number that lets lenders know how much of a credit risk you are. The credit score is a number, usually between 300 and 850, that lets lenders know how well you are paying off your debts and how much of a credit risk you are.
In general, the higher your credit score, the better credit risk you make and the more likely you are to be given credit at great rates.
There Is A Over-Emphasis Put On Credit Scores
Scores in the low 600s and below will often give you trouble in finding credit, while scores of 720 and above will generally give you the best interest rates out there.
However, credit scores are a lot like GPAs or SAT scores from college days – while they give others a quick snapshot of how you are doing, they are interpreted by people in different ways. Some lenders put more emphasis on credit scores than others.
Some lenders will work with you if you have credit scores in the 600s, while others offer their best rates only to those creditors with very high scores indeed.
Some lenders will look at your entire credit report while others will accept or reject your loan application based solely on your credit score.
Do You Want A Computer Deciding Your Credit Worthiness?
The credit score is based on your credit report, which contains a history of your past debts and repayments. Credit bureaus use computers and mathematical calculations to arrive at a credit score from the information contained in your credit report.
Each credit bureau uses different methods to do this (which is why you will have different scores with different companies) but most credit bureaus use the FICO system.
FICO is an acronym for the credit score calculating software offered by Fair Isaac Corporation company. This is by far the most used software since the Fair Isaac Corporation developed the credit score model used by many in the financial industry and is still considered one of the leaders in the field.
Different Ratings Agencies Produce Different Scores
In fact, credit scores are sometimes called FICO scores or FICO ratings, although it is important to understand that your score may be tabulated using different software.
One other thing you may want to understand about the software and mathematics that goes into your credit score is the fact that the math used by the software is based on research and comparative mathematics.
This is an important and simple concept that can help you understand how to boost your credit score. In simple terms, what this means is that your credit score is in a way calculated on the same principles as your insurance premiums.
Calculating A Credit Score Is All About Information…Your Information
Your insurance company likely asks you questions about your health, your lifestyle choices (such as whether you are a smoker) because these bits of information can tell the insurance company how much of a risk you are and how likely you are to make large claims later on. This is based on research.
Studies have shown, for example, that smokers tend to be more prone to serious illnesses and so require more medical attention. If you are a smoker, you may face higher insurance premiums because of this.
Similarly, credit bureaus and lenders often look at general patterns. Since people with too many debts tend not to have great rates of repayment, your credit score may suffer if you have too many debts, for example.
Understanding this can help you in two ways:
#1 It will let you see that your credit score is not a personal reflection of how “good” or “bad” you are with money. Rather, it is a reflection of how well lenders and companies think you will repay your bills – based on information gathered from studying other people.
#2 It will let you see that if you want to improve your credit score, you need to work on becoming the sort of debtor that studies have shown tends to repay their bills.
You do not have to work hard to reinvent yourself financially and you do not have to start making much more money. You just need to be a reliable payer. This realization alone should help make credit repair far less stressful!
How Are Credit Reports Compiled?
Credit reports are put together by credit bureaus, which use information from client companies. It works like this: credit bureaus have clients – such as credit card companies and utility companies, to name just two – who provide them with information.
Once a file is begun on you (i.e. once you open a bank account or have bills to pay) then information about you is stored on the record. If you are late paying a bill, the clients call the credit bureaus and note this. Any unpaid bills, overdue bills or other problems with credit count as “dings” on your credit report and affect your score.
Information such as what type of debt you have, how much debt you have, how regularly you pay your bills on time, and your credit accounts are all information that is used to calculate your credit score.
Your age, sex, and income do not count towards your credit score. The actual formula used by credit bureaus to calculate credit scores is a well-kept secret, but it is known that recent account activity, debts, length of credit, unpaid accounts, and types of credit are among the things that count the most in tabulating credit scores from a credit report.