Understanding Credit Score – An Easy Guide

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What is credit score? I will start with a life drama. When one of my friends ringed me,

I found he is panic. He told that a home loan he had applied was rejected! The reason was ‘poor credit score’.

He was not aware about that and bank official advised him to first improve the score then re-apply.

As he had paid a considerable non-refundable amount to the builder as advance, he got confused what will do now to get a loan at the earliest. Or, the result will be the loss of advance.He thus finally landed to me.

This original scenario directly pointing the fingers to the lack of awareness about the credit score, especially people from third world countries.
By knowing the problem, I have given an idea on what credit score is and how it will go low and how to improve.Anyway, he later managed to improve his credit score to a great level and got a home loan from the same banker who rejected the loan earlier.

To know how he succeed, continue reading his story at the end of this article.

So, what is a credit score?

Credit score is nothing, but the points, starts from 300 to 900, shows the trustworthiness of a borrower. Banks uses credit score to evaluate the borrower to understand whether he or she repay the loan or not. So simple right?

What are the credit score ranges

  • A credit score point between 750-900 considers as excellent. Easy to get all types of loan and credit cards
  • Point between 700-749 considers as good. Eligible for better interest rates on loans and eligible for credit cards.
  • Point between 650-699 considers as Fair. Still possibility to get loan approval with conditions.
  • Points between 600-649 considers as doubtful – Difficult to get loan as well as credit cards etc.
  • Anything less than 600 considers as bad. Loan approval chance is very limited

What are the Advantage of Good Credit Score?

A borrower with good credit score, say, more than 750 points, will get any loans easily along with law interest rates.When apply for a loan or credit card, approval chance id double compares with others have less credit score.

It also helps the borrower to get higher limits and gives a negotiating power on interest rates, loan duration etc.

How to Maintain a Good Credit Score?

  • In order to achieve a good credit score, the person should have a clean on time repayment history without even missing a single repayment schedule.
  • He should have control on credit card utilization as well as on time payment history for the credit cards.
  • Experience of the borrower with all types of credits is a supporting factor to achieve higher credit score.
  • Avoid applying multiple loans or credit cards. Each time you make an application, enquires about the borrower would initiate and multiple enquiries at a time badly affect the credit score.
  • Credit history matters. A lengthy and perfect credit history of the borrower would increase the credit score as well as possibility of approving the loan fast.
Note: Having multiple credit cards, paying only minimum due amount, frequent credit limit increase, not cancelling old credit cards etc. will negatively impact to the credit score.

How to Improve the Credit Score?

One can improve credit score through following below steps. However, it take time to build an excellent credit score.
  1. Ensure to cancel all the old credit cards, do not increase the credit limit frequently, repay dues.
  2. Ensure to not ask for any discounts for onetime settlement of outstanding credit card dues. Instead, pay it full for a clean closure. Also keep your balances low.
  3. Repay outstanding installments of all secured (home loan, auto loan etc.) and unsecured loans (personal loan, credit card loan etc.), never apply for multiple loans, never apply for a same loan, such as home loan, from multiple lenders, repay the loan timely. Ensure to get no due certificates upon closing each loan.
  4. Utilize the power of credit builder loan. These are quick loans with small amount and less repayment duration. It can be any loan such as personal loan. It can be secured or unsecured loans. Apply for quick loans and repay the loan on time. This is an excellent method to improve your credit score to a great level. This exercise can be continued upon closing one loan completely and applying for another quick loan.
  5. Maintain a healthy mix of secure and unsecured loans with a long history of credible repayments.
  6. Do not have a habit of frequent apply of loans.
  7. Maintain any joint accounts to payments on time. Joint account holders are equally liable for missing payments.
  8. Ensure you are paying all your bills including utility bills, cell phones etc. on time. Setting up payment reminders are a good idea to not miss any payment timeline.

Main Factors Deciding the Credit Score

Many factors influencing the calculation of the credit score. It is also different in countries. Below are the most common factors deciding the credit score of an individual:
  • Payment history – On time payment, full or partial payment etc. (35%)
  • Amounts Owed (30%)
  • Length of Credit – The longer you have an account, the better the score is (15%)
  • Credit Mix – History of secured and unsecured loan mix (10%)
  • New Credit – Ensure to apply with multiple lenders (10%)

Important Things to Know About Your Credit Score

  1. Credit score is no way related to your income, savings or investments. But related to your debt activities and credit history.
  2. Your personal data or credit score data will not be published to public or anywhere else. It would be given only to trusted enquirers who required to know about the score of an individual.
  3. Defaulting a payment along with closing and active or inactive credit card reflects to your credit score
  4. Credit score or credit reports cannot be edited, and it would be generated upon your activities only.
  5. Credit score considers as giving the first impression to the lender and not the sole to an instant decision of approval or denial. Lenders have different screening processes to decide approval or disapproval of a loan.
  6. Payments defaulted more than 3 years ago will not be taken to the account while determine credit score
  7. Excessive credits will affect badly to the credit score
  8. Credit reports are free – It can be received from approved credit bureaus and/or credit monitoring agencies.
  9. Credit updates happening when there is a hard inquiry, late payment, default in payment, settling or writing-off the amount.
  10. Credit reports are the detailed report on your financial activities. Credit score is a single numerical number to know your total score based on the credit report.
  11. Improving the credit score do not have a particular time frame. It totally depends on your disciplined financial behavior and consistent performance.

Who has Access to Your Credit Score?

  1. Banks – To decide to approve or deny an applied loan
  2. Insurance Companies – To decide how much premium to be charged for a policy
  3. Creditors – To approve for mortgages and credit cards
  4. Government Agencies – To know your credit worthiness during applying for government benefits
  5. Employers – To decide to give a higher position with the company.
  6. Utility Companies – To know whether to collect a deposit or not
  7. Landlords – To decide to give a property on rent

Conclusion

 
OK Friends now read the remaining story on how my friend got succeed with improved credit score!
“He had spoken to the builder and got an extension of 6 months to pay the balance amount. He then done his homework and had replayed all the outstanding dues with credit cards.Cancelled multiple credit cards except the secure one. Pay-off all the loans and mortgages and got the ‘no due certificates’ from the bank and lenders.

He applied for a personal loan with 6 months duration and pay-off the same on time and closed the loan within the duration. He also set alerts for all the payments to not miss any.

Within 6 months, his score increased to 770 and approached again to the bank for a home loan with improved score, they happily accepted the request and processed the loan.He got approval for the home loan and brought the home in the city. He started repaying the loan on time and a happy individual now.”

So, what about you? Does this matter to you?   Or, do you still look for further help or information? Whatever it is, I will hear you. In the comment box below, mention your doubts, experiences, plan on improving the score or even the activities you are in the middle of, to improve the score. Let others too have a lesson and engage.