What is a Credit Score?
Summary: A credit score is a three-digit number that predicts the likelihood of you making payments on time and is primarily utilized to predict the financial habits of a borrower. Auto lenders, mortgage lenders, credit card lenders, and even landlords will check a borrower’s credit score before offering products.
A credit score is a three-digit number that predicts the likelihood of a borrower making on time payments. Credit scores typically range between 300 to 850. There are different types of credit scores, but the most common type is a FICO score. Auto lenders, mortgage lenders, credit card lenders, and even landlords will check a borrower’s credit score before approving the loan.
Credit scores are primarily utilized to predict the financial habits of a borrower. When it comes to home loan lending, for example, mortgage lenders will use credit scores to evaluate the loan qualifications and interest rates. The following factors are all evaluated to help calculate a borrower’s credit score.
- Borrower’s payment history
- Total amount of debt owed
- Length of the credit history
- Types of credit
- New credit
How you use the evaluating factors can both positively and negatively impact your score.
- On-time payments
- Making on-time payments shows consistency and active responsibility for the loan.
- Credit usage
- Evaluates the amount of the credit limit being used.
- Length of credit history
- Types of credit accounts
- Evaluates all credit lines such as credit cards, auto loans, or home mortgage loans.
- Recent activity
- Total debt amount
- Evaluates the total debt currently taken out.
If your credit score is low, here are a few suggestions to improve it:
- Make Payments On Time
- Shows consistency and responsibility towards the loan
- Do Not Close Credit Cards
- Shortens your credit history and affects your credit utilization ratio
- Increase Credit Limit
- Do not use the entire new amount.
- The goal behind the increase is to improve your credit utilization ratio which impacts your credit score.
- Keep Your Balance Low
- A high debt balance may demonstrate unhealthy spending
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