Understanding Credit Score and How to Maintain it

Credit score is a scoring tool that is used to borrower’s creditworthiness. They are used to see how good people are at paying their debts, and assess the risk of how likely they are to default (not pay back) on a loan. The higher the score, the lower the risk to the lender. The first step to getting control of your credit to perform a credit score check which can help you understand where you lie. These services also have credit monitoring in order to help keep loan approval higher. There are also online credit repair options that can help negotiate certain rates on your behalf. They will develop a strategy and plan for you to stick with. 

With regards to getting a loan, a lot of applicants get denied by traditional banks due to their credit, or lack of collateral. While there are services that can help you get a loan no matter what your credit is, it is important to raise your credit as it lowers your risk to the lenders. These bad credit loans services do not run any hard inquiries on your report until after you are approved for the loan and accept the terms, and there is no collateral that needs to be put up against the loan.

Where Does Credit Score Come From?

Credit scores are based on statistical models developed by Fair, Isaac and Co., a financial services company founded in 1956. Also known as a FICO score, this evaluation of your credit uses five types of information.

The amount of debt you are carrying. If you owe a lot of money, it lowers your credit score. Being close to the limits on your credit cards lowers your credit score as well as having a large balance remaining on an installment loan.

The length of time you have been using credit. If your use of credit is recently established, your credit score is lower.

The recent opening of new credit accounts. Having several new credit accounts can lower your credit score. If there are numerous credit inquiries on your credit report, it may give you a lower credit score, as it shows you’ve been shopping for credit.

Your payment history. Charge-offs, foreclosures, judgments, or bankruptcies on your credit record lower your credit score. Late payments bring down your credit score. On the other hand, do not think that paying off and closing credit accounts will improve your credit score. It is best to pay off an account and leave it open with a zero balance, because it adds positive information to your credit history.

Types of credit. Using secured credit cards or borrowing from finance companies can lower your credit score. Having too many revolving accounts can lower your credit score. In some cases, using the services of a credit counseling or debt management agency can lower your credit score. Although it has been several years since Fair, Isaacs revised its formulas to ignore the use of credit counselors, your score could still be lowered if your creditors are reporting your payments as late because of a reduced amount agreed to with the credit counseling or debt management agency.

How to Improve Your Credit

The first thing to know is that there are many credit monitoring services out there to have a brief understanding of where you current credit score is. Once you find out where your credit stands, the next step is to take action by identifying where you need improvement. Obtaining a credit score check is typically free, unlike getting a copy of your credit report. 

How your credit score is typically weighted:

1. Payment timeliness – 35%

2. Amount of debt (ratio of balances owed to total available credit) – 30%

3. Length of time using credit – 15%

4. New credit accounts or recent credit inquiries – 10%

5. Types of credit (credit cards, installment loans) – 10%

Once you have identified where you need improvement, you will need to take action. 

If you are in a lot of debt, I would look into debt repair or debt management companies that can help you develop a plan to lower or eliminate your debt over a period of time. 

For those who are still able to apply, there are many credit cards for bad credit that can help you raise your credit in a timely fashion. They typically will have a $500 credit line, and are beneficial if and only if they are paid off as soon as possible. Although they don’t have an interest rate, it will affect your credit worse if you don’t pay on time.