A good credit score is essential in today’s society. When you pay your bills on time, companies are informed that you are are good financial risk and are more willing to do business with you. It is surprising how often this information is used. From opening a bank account to employment opportunities to renting an apartment.
But how is your credit score measured? FICO is the most popular tool used, however there are others. On that scale credit score 500 and lower is considered risky by lenders and financial institutions. If your credit score is 700 or higher then you have a much better chance of obtaining loans at good interest rates.
Credit Report Scale
Before you apply for loans, it is recommended to get a free copy of your credit report from one of the bureaus. Understand, however that your credit score is only a part of the approval criteria. The lender will adjudicate your application based on a number of factors.
It is important to understand how on the FICO scale a credit score for you is determined. That way you can take the steps required to improve it if necessary.
The main factor is repayment history. How timely have your present and past loan and credit card payments been. Late payments, especially those greater than 30 days will have a big detrimental effect on your credit score.
Financial institutions also look at how long you have been operating your credit accounts. Accounts that are just a few months old, but paid on time are not going to instantly give you a high score. You need to build a much longer history of paying on time for it to have a greater effect.
They also look at how involved you are or how high your outstanding balances are. If you have a lot of credit cards and they are all maxed out, somewhere low on the scale credit score will be assigned.
Lenders also review how many recent credit inquiries there have been. The idea is that they want to avoid “credit seekers” or people who are amassing a large amount of debt or available borrowing room.
If you do find yourself low on the FICO scale credit score improvement can only come with time. Yes, time is your best friend here. Make a commitment to start paying all of your current debt obligations on time from this point forward. Steadily decrease the balances so you are not at your limit on the cards. After building a track record with this behavior, you will be rewarded with faster approvals and lower interest rates.