Are you looking forward to take that credit card and are worried about all the technical terms that are associated with it?
Well worry not. This is a guide that tells you everything you need to know about credits.
First of all, if you are going to take the credit card, the lender or your bank will first check that you meet the certain criteria. One of the most important factor that can take you 1000 steps closer to getting the credit card is you credit score.
So what is this credit score?
Credit score is basically a measure that shows the credibility of the receiver. The lender or bank might not want to lend their money to someone who would not be capable of returning it. Your credit score simply shows your history with your payments.
Banks and lenders use the credit report which contains the credit score to see whether the person is reliable with the money or not. The credit score ranges from 300-850 points. Higher the score, higher are your chances of getting the loan or credit card. This basically shows your financial trustworthiness.
Who created this credit score thing?
This was first introduced by Fair Isaac Corporation (FICO). Although there are many other methods of measure the financial stability of an individual most financial organizations still use this method to evaluate the credibility of the people.
Factors that affect the credit score?
Now the most important thing is that how can you have a strong credit score. Well, there are a number of ways through which you can maintain a steady score. Some of these are:
- Payment History
- Payment history shows how regular you are with your payments. The more you pay more loans and mortgages on time, the cleaner history you have. Make sure to pay all your payments on time. Meet all your deadlines and plan beforehand. Follow the deadlines closely as this makes a he impact on your credit score.
- Payment history can affect about 35% of your credit score. So make sure that your payments are always on time.
- Total Amount Borrowed
- Another factor that is very important for a steady credit score is the amount you borrow from the bank or a lender. Higher credit card limits used is also not recommended. One should always stay well below the credit card limit. Total amount borrowed contributes about 30% is determining your credit score and is referred to as credit utilization.
- Types of Loans
- The type of credit determines about 10% of the credit score. This shows what kind of loans is an individual indebted to. They could be a mixture of personal loans, student loans, mortgages, credit cards etc. This also considers the various accounts of the individual in different banks.
What is a good credit score?
- As it has been mentioned that a credit score ranges from 300-850, a good score lies somewhere around 670 to 739. The distribution of credit score can be done like this:
- A poor score ranges from 300-579
- A fair score ranges from 580-669
- A good score ranges from 670-739
- A very good score ranges from 740-799
- An excellent score ranges from 800-850
Lower values of credit score indicate that you are not so suitable candidate for the loan. And lenders or bask will hesitate from giving you loans. Individuals who have credit score below 640 are usually considered as subprime borrowers and they usually get a loan on higher internet and markup rates.
This is done by banks to give themselves some surety for taking a risk. The people with poor or fair scores may also get shorter repayment periods or agree to low scores in return.
On the other hand, the people with good, very good and excellent scores get different perks. They may get loans with conventional mortgage payments having lower interest rates. The people with excellent score ranges can get extremely low interest rate loans and higher payback periods. They may also get additional credits on their credit cards.
How can you maintain a steady credit score?
One thing that is most important while maintaining a good to excellent credit score is staying on top of your payments.
This means one should be very punctual and mindful of his/her payments. Keep close tabs on the deadline and make sure you pay each loan before the deadline. Because one missed deadline will affect the other deadline and that will affect the other deadline and in no time you would be facing the snowball effect.
Staying under the credit limit is also a key factor that can boost your credit score.
you can improve your credit score by following he above mentioned and many other approaches.