Piyush Gupta 08 Aug, 2024
Credit scores are numerical representations of a person's creditworthiness, used by lenders to assess the likelihood of a borrower repaying their debts. In the United States, the most common credit score model is the FICO score, which ranges from 300 to 850. Another popular model is the VantageScore, which also ranges from 300 to 850. Both models consider several factors to calculate a credit score:
Importance: Payment history is the most significant factor in credit scoring. It reflects whether an individual has paid their past credit accounts on time.
Impact: Late payments, defaults, bankruptcies, and foreclosures can negatively impact your score. Conversely, consistent on-time payments improve your credit score.
Importance: This measures the amount of credit you're using compared to your credit limits.
Impact: It's calculated by dividing your total credit card balances by your total credit card limits. A lower utilization ratio (typically below 30%) is favorable and can positively impact your score.
Importance: This factor considers the age of your oldest account, the age of your newest account, and the average age of all your accounts.
Impact: A longer credit history generally results in a higher score, as it provides more data on your credit behavior.
Importance: This evaluates the variety of credit accounts you have, such as credit cards, mortgages, car loans, and retail accounts.
Impact: A mix of different types of credit can be beneficial, as it demonstrates your ability to manage multiple types of credit.
Importance: This factor looks at recent credit inquiries and new credit accounts.
Impact: Opening several new accounts in a short period or having multiple hard inquiries can be seen as risky behavior and can lower your score. Soft inquiries, like checking your credit score, do not affect your score.
While VantageScore uses similar criteria, the weightings might vary slightly, and it might also consider trends over time, such as how credit behavior has improved or worsened.
Pay Bills on Time: Always make at least the minimum payment by the due date.
Reduce Credit Card Balances: Aim to keep your credit utilization below 30%.
Avoid Opening New Accounts Rapidly: Space out applications for new credit to avoid a sudden spike in inquiries.
Maintain Old Accounts: Keep older accounts open to maintain a longer credit history.
Monitor Your Credit Report: Regularly check your credit report for errors and dispute inaccuracies promptly.
Understanding how credit scores are calculated can help you make informed decisions about managing your credit and improve your financial health over time.
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