Different credit bureaus and private companies prepare credit reports and scores that are widely used by financial institutions to measure someoneâ€™s credit worthiness. A good credit score automatically qualifies somebody for credit while someone with bad credit score is often declined credit by the lenders. This can have a very serious effect on someoneâ€™s financial life. Apart from discrimination in the access to credit, people with bad credit score are also discriminated against in renting a property and employment. This means that someone with a bad credit score can face difficulties in finding an accommodation on rent. Even employers are known to check credit scores before offering a job. People with seriously bad credit are often declined a job that he or she may otherwise qualify for. This means credit score has a serious bearing on someone’s financial and social life. However, a bad credit score can be improved over time with more responsible financial behavior. So, letâ€™s start building your credit today by credit score check as you can also do free credit score check.
How credit scores are calculated
There are quite a few credit bureaus that keep track of financial transactions and prepare their own credit scores. The most famous of them is FICO score credit report. It is named after the data analytics company FICO (Earlier, Fair Isaac Corp.) that prepares the financial credibility score for people and organizations in the US. It is one of the most popular credit scores and most lenders accept and ask for it before taking any lending decision. There are many factors that determine the credit score such as your debt payment history and the amount of credit used. A history of making regular and timely payment of your debt and keeping a larger portion of your credit card unused makes your score go up.
While FICO does not reveal how it calculates someoneâ€™s credit score, it is believed that it gives different levels of importance to 5 chief credit indicators. Here is how FICO is believed to prepare your credit score
Â· Payment history: 35%
Â· Credit owed: 30%
Â· Credit history: 15%
Â· Type of credits: 10%
Â· New credit: 10%
While preparing credit scores, all of these factors are taken into account as per the weight assigned to them. No one or two factors but all of these factors are considered.
Apart from FICO scores, there are at least 3 more credit bureaus that prepare their own credit scores. They are TransUnion, Equifax, and Experian.
Why a good credit score matters for finance and renting
Finance companies, banks, and lenders look at your credit score to check whether your debt payment history is impeccable or not. They donâ€™t feel comfortable to lend to someone who has a history of defaulting on debt payments. The biggest reason for a bad credit score is non-payment of monthly installments on time. On the other hand somebody with a long history of credit but good payment history has a better credit score and lenders like to lend credit to him.
So whether you want to buy a home or a car, if your credit score is good, you get the mortgage without any problem. But if your credit score is bad, nobody is ready to lend you.
It is almost a similar situation when you try to find a home on rent. The new landlord would normally like to see your credit report and the fact how you have been paying off your previous landlord. He would be interested to know if there was any payment default, or if you have been evicted because you did not pay. But if your credit report is clean and flawless, the landlord may happily rent his home to you.
How to get a free credit report
You are entitled to get a free credit score from all of these credit bureaus once a year. You can buy your credit report anytime by paying a fee. There is another way to get your free credit report. You can get an Experian credit report through a company that sells financial products as they normally buy access to credit scores so that it can sell its products to individuals and businesses who have good scores. They allow you to do a credit check by submitting your details on their websites. So you can use these websites for a free credit check any time for free.
How to improve your credit score
If your credit score can become bad, it can also become good. But for this you should make sure you donâ€™t make the same financial mistakes that had your credit score go from good to bad in the first place.
So here are the different steps you should take to repair and improve your credit score.
Pay your debts regularly and on time: Lenders like to lend to people who are reliable in repayment. They like to see how you have paid off your previous credits. If you are consistent in bill payment, your credit score automatically improves. So, make it part of your financial life.
Pay your utility, phone bills on time: Your credit score can improve even if you pay your utility and phone bill on time. This is part of an opt-in-product plan that allows credit bureaus to check your bank account for utility payment.
Pay off your debts and keep your credit card in good health: Yes, this can be a big boost to your credit score. If you can, pay off your debt and also clear all credit on your card to improve your card score. But if you canâ€™t do so in one go, at least make sure you pay the monthly on time. This too can repair your credit score.
Try to prove that you are financially more responsible: You can buy different kinds of credit cards and work responsibly with them. Once there is a history of you taking credit and repaying it responsibly on time, it will start reflecting positively on your card.
Check your credit report for discrepancies and report them: Sometimes, it is possible that your credit score has not taken cognizance of a payment you made on time and itâ€™s ruining your score. Report these matters to the credit bureaus and get them corrected.
Take help of a professional credit builder company: There are a lot of credit building experts who can guide you on how you can improve your credit score. It can be a good idea to take help from such companies and people.