Your credit score is a valuable asset in modern times. It influences your financial life all the way. The more you know about it, more you will succeed financially. Very few people know exactly how it is calculated. Here are some interesting facts for you –
1. Why it is called FICO – Your credit score is based on the date collected and analyzed by a company called Fair Isaac Corporation. That’s why it is called FICO score.
2. What is its importance – The score tells your creditors the extent of risk they will take if they lend you money. If you have a high score, creditors are comfortable lending you more money. But if you have a lower one, they will assume that the chances of getting their money back are less. You may then face tougher terms like higher rate of interest or shorter repayment periods.
3. The score is divided into five parts – Various aspects of your financial details make up the total credit score. You history of re-payments, credit presently enjoyed by you, and duration of your credit history, things like this will hit your credit score.
a. Your history of payment – Your prospective creditors want to know whether you pay your bills on time or not. This is a very important factor for any creditor and 35 per cent of the score will be based on this factor. Even if you are not regular in paying your utility bills, it will reflect on your score.
b. The ratio of available credit – Your utilization of available credit will show how much ‘needy’ you are while applying for a loan. If you have used your credit cards to the fullest, it will hit your score badly. This will be taken as a sign of weak financial position. 30 per cent of your score is based on this ratio.
c. Duration of your credit history – If you are enjoying credit for a long time without any repayment problems, you are a good customer. 15 per cent of your score is made up of this factor. So it is advisable to hold on to credit cards which you got long ago, even from your student life!
d. Your expectation of credit – The amount for which you are applying for a credit will also be an important factor. 10 per cent of your score is made up on this basis. While applying for a big mortgage, all your other debts will be considered to find out whether you are a risky customer. Once you get such mortgage, your score will lower immediately as a consequence.
e. Type of credit used by you – Credit is after all considered as debt but there are grades of credit. If you have low or no interest credit cards, that is considered as good credit. If you are paying a good percentage of principle out of your loan regularly, it will be taken as a good sign as you are making the repayment quickly. The final 10 per cent of your credit score is calculated on this factor.
4. There are some strange things which will affect your credit score. For example, if you are late in the payment of your library dues, this fact may be reported on your credit report and it will immediately lower your credit score! You may miss out on payment of a bill from your doctor under the assumption that your insurance cover will take care of it, and it will hit your score! You should be very careful about such accidentally unpaid invoices and should make prompt efforts to resolve them.
5. The number of credit cards you hold will also affect your credit score. Many people are just fond of collecting more and more credit cards as a hobby! This habit may prove costlier for them as they may get tougher terms.
Your prospective lenders will determine on the basis of your credit score whether you are an eligible customer for them on not. So it is important for you to protect it from all these hardships. It is just like your baby and you need to take extra care to see that it grows bigger and healthier.
Credit report is the keyword in today’s lifestyle. You have to take care of it, keep it healthy and growing. Which factors make it weak? How to avoid them? Chintamani Abhyankar provides elaborate advice to develop a good credit score.