Modern society has digitalized our life to a large extent. Credit score is one of the most representative changes we noticed in the past decade. Now we need a credit score to evaluate our financial trustworthiness. We are trying to make it higher, so as to get lower interest rate in loans. Credit score attaches great importance to us, but do you really understand what a credit score is?
The most widely used credit score system is FICO. FICO has five grades of credit scores, Excellent: 800 to 850; Very Good: 740 to 799; Good: 670 to 739; Fair: 580 to 669; Poor: 300 to 579.
Different grades enjoy different rates. For example, if your credit score is below 640, you are generally considered as a subprime borrower. If you want to mortgage from financial institutions, they will charge interest at a rate higher than a conventional mortgage in order to compensate the risks they are carrying. You may also be required a shorter repayment term or a co-signer. On contrast, if your credit score is 700 or above, you will be offering lower interest rates.
All of us realize that for credit scores, the higher the better. The question is how to increase our credit scores.
There are five main factors that influence our credit scores: payment history, credit utilization, length of credit history, types of credit and new credit.
This is the most important factor making up your credit score. Your payment history honestly shows whether you make payments on time or not. One delay or missing payment may lead to a decrease to your credit score. Always remember to pay your bill on time, or you can simply set an auto pay to avoid late payments.
This is the percentage of your balance to your total available credit. For example, if you have a credit card, whose credit line is $5000, and you have a balance of $1000, then your credit utilization is $1000÷$5000=20%. The lower the better. If your credit utilization is high, lenders will consider you are a credit risk. So, everyone should keep credit card balances as low as possible.
Length of Credit History
This factor is calculated from your oldest account, but also the average age of all your accounts. A longer history can lead to a higher credit score.
Types of Credit
This considers the mix of your installment credit and revolving credit, such as car loans, mortgage loans and credit cards. Credit scores can be improved if you show your ability in handling multiple kinds of credit.
This includes not only how many new accounts you have, but also how many inquiries you’ve made. Don’t open new accounts too rapidly in a short period of time, for that FICO may think you a great risk.