For an economy to function smoothly, there has to be a regular influx of liquidity, infused by financial institutions. If it weren't for open credit lines made available by banks, most of the businesses that are prospering today, may never have begun. The economic recession has taught us the perils that careless use of credit lines can put people in.
In this era of multinational corporations going bankrupt, banks are more careful in analyzing loan applications and one of the details which they pay close attention to, is the credit score.
What is a Credit Score Rating
Banks, credit unions and other finance institutions need an objective criteria for analyzing the creditworthiness of any person, who is applying for a line of credit. That's what the provision of a credit score accomplishes in the USA.
|FICO Credit Score
(As per Experian)
|750 & Above||Excellent|
|700 to 749||Good|
|650 to 699||Fair|
|550 to 649||Poor|
|550 & Below||Bad|
Experian, Equifax, and Transunion are the credit bureaus responsible for the assimilation of financial and credit usage related data of all individuals in the USA and the calculation of credit scores, based on that data.
They all use the FICO algorithm for calculating these scores, which takes many variables like credit history, outstanding debts, and past credit usage into consideration. You can get your FICO scores from any of these bureaus. When you apply for loans, the finance institutions scan your credit report and rating to determine your ability to repay them.
The credit rating scale maximum and minimum stretches from 850 to 300. While the highest score possible may be totally unattainable, anything in its vicinity is considered to be an excellent score. Depending on the credit usage history, your score could be anywhere in the range presented here.
Credit Score Determinants
To maintain a good credit score, you need to understand the determining factors which decide its value. Knowledge of these factors will help you understand how your day-to-day financial transactions can impact your creditworthiness. Here are the factors which directly affect your rating.
Payment History Has a Weightage of 35% In Credit Score Rating
How particular have you been in paying your credit card bills, loan installments and dealing with any form of debt, does affect your credit score. Bankruptcy, court cases, and delayed debt payments can adversely affect your credit rating.
On the other hand, timely debt payments and a clean financial record will boost your score. The time interval since your last outstanding debt payment, bankruptcy, and the number of debt items also influence the score.
Debt/Amounts Owed Has a Weightage of 30% In Credit Score Rating
Next most important factor that affects your credit score are the amounts of money you owe on each of your financial accounts. The proportion of credit usage in relation to your credit limits on every account and the total amount of loan installments pending on your accounts is taken into consideration.
Credit History Length Has a Weightage of 15% In Credit Score Rating
The overall length of time over which you've used credit lines and your banking accounts also influences the score. A prolonged good record of good credit usage helps boost the score.
New Credit Lines Used Has a Weightage of 10% In Credit Score Rating
The number of new credit lines used or banking accounts, which you have recently opened, impacts your score.
Credit Types Used Has A Weightage of 10% In Credit Score Rating
The range of different credit types used will also influence the credit rating. The way you've handled various types of credit, is also taken into consideration.
The financial data which the FICO algorithm uses to calculate your credit score, is derived from credit reports. Let us see how scores are perceived by financial institutions.
Major Changes in the Credit Score Determinants
Trended Data Will Be Consider Before Approval of a Credit Line
One of the major changes in the credit score determinants is the Trended data. The Trended data is nothing but the borrower's financial trajectory tracked on a monthly basis.
This will track your usage of the credit cards and accounts and determine whether there is a possibility of a big debt. So the old golden policy of keeping all the credit cards open for a good credit score is now out of the window.
Exemption on the Civil Judgment by the Credit Score Leaders
This big change took place is 2015 and is still going strong. The exemption of civil disobedience means now the medical debts and the tax liens will not be considered as a determinant for the credit score.
The chief problem with the judgment was the incurred debts due to medical emergencies that surfaced in the credit score before the medical insurance could take care of it. It is remedied now and the people take a sigh of relief.
Credit Score Scale
Before applying for a loan, it's essential that one refers to the scale presented, as it will give you an idea about the odds stacked against your loan application's safe passage.
If you fall in the bad credit score range, be ready for a tough negotiation session with the bankers. If you find yourself in the average or good category,you can be a bit more hopeful. Falling in the excellent score category, will put you in the league of people who are considered most favorable, when applying for loans with banks.
Credit Score is Not the Only Thing Considered Before Applying For a Loan
Credit score is not the only factor upon which, banks base their decision. They will consider your current financial position, present earning capacity, the collateral you are willing to offer, and the potential of your business endeavor if any, before they make a decision.
With the changes made recently, it shows how sensible the banks have become to incur criteria that will reveal the borrower's true financial state and not just curt numbers based on shallow criteria.
Although it's not that individuals with bad score won't be able to get loans, but the terms and conditions, including interest rates charged, could be more harsh than normal. In case of a bad rating, a bank may also demand collateral.
On the other hand, if you have less baggage in the form of past bad financial karma, you may actually end up with a good score, which will make your life easier, when applying for loans.
An excellent score will see to it that finance institutions open their doors wide open for you! Look at the chart presented here and see where you stand right now and decide where you would want to be in a year's time. Create a financial management plan which will help you improve credit scores to higher levels in the future.