Do you have a good credit score? While most people are familiar with the term “credit score,” very few truly know or understand it. There is much confusion on how credit scoring works. By educating yourself on your financial standing, you can maintain a good credit score and be able to purchase the things you need in life.
FICO and The Credit Score - Why Are They The Same?
Some lenders use the term FICO, while others use the verbiage credit score. The FICO is an acronym that stands for Fair, Isaac, and Company, though many people don’t know this. In San Jose, California, Bill Fair and Earl Isaac, created a data analytics company in 1956. Their model was created to measure the consumer credit risk to potential lenders. While it was in existence, it wasn’t openly used until 1986 when the New York Stock Exchange began trading. In 1995, Fannie Mae and Freddie Mac were the first lenders to use this system to approve or decline potential home buyers. Since that time, it has become a fixture in consumer lending. It doesn't matter what term is used, they both mean the same thing.
How The Credit Scoring System Works?
When anyone pulls your credit score, they are given a number. These numbers range from 300 to 850. The higher your score, the better your chances of getting approved. These scores indicate the level of risk that is involved with lending to you. Most lenders have a cut off margin. For instance, it is difficult to purchase a home with a score under 620. The reason is because the risk is great. Prime lenders give great interest rates to those who are a lower risk. They look at the past credit record to predict the future. If your credit score is really low, then there is a significant chance that history will repeat itself.
A mathematical calculation of both the positive and negative information Is used to formulate your credit score. A credit report has five categories it examines, and they are the payment history, the amount of money you owe to other lenders, your length of your history, and the type of credit that you have established. Your score will rank higher if you have diversification. For instance, if you have $10,000 in credit card bills, you won’t have as high of a score as someone who the same amount split between an auto loan and credit cards. Better still, the minute you sign for a mortgage, your credit begins to change. This is considered a major purchase, and only those with a certain level of credit can buy a home.
Why Monitoring Your Score Is So Important?
A credit score is ever changing. Each open account, reports to the credit bureau every month. Any account that is 30 days past due will show as a slow pay. A credit score is not set in stone. They are a snapshot of your history at that specific time. Reviewing your score on a regular basis will help you to see the things that you need to work on. Once you have been denied for credit, you can get a copy of your credit report for free. Additionally, you can receive one copy of your credit report from each of the three bureaus each year. By going to annualcreditreport.com, you can see what needs work and what is good on your report, and there is no charge for this service. Practicing good financial behaviors and making informed decisions will make positive shifts in your score.
It is often the case that there is negative or erroneous information on your credit report. This information will drag down your score. Checking your report often will help you to remove these items. You can submit a dispute to the credit bureau. They will investigate the matter for you. If the company does not respond to their inquiry, then they will remove it for you in 30 days. Many times, the company will not respond or the account has been sold numerous times. If they can prove that the debt is valid, then it will remain on the report until proof of payment is presented.
Building A Good FICO Score Is Vital!
As a millennial, you should watch your credit utilization rate. For instance, if you have $5,000 in available credit on your credit cards, then you don’t want to go above $1,500 in charges. This is because your balance-to-limit ratio will be off balance. This is a huge factor in your credit score because you will be seen as a credit risk. Those who have their credit maxed out can have issues down the road. The credit scoring system takes off points for your utilization rate being too high. Lenders will be reluctant to extend credit to you, which can make getting a loan difficult.
The credit score is an important factor used to determine the interest rate you will receive on a loan. It is also used to decide if the lender will extend an offer of credit or not. High credit scores have perks and benefits that are not seen in lower credit scores. For instance, your score will allow you to have offers for increased limits on credit cards, pre-approved offers, and lenders begging you to take out credit. Those with bad credit must suffer from high-interest loans and lackluster terms.
Why Credit Scores Take Constant Maintenance?
Maintaining your credit is a lifelong job. Even if you get your score where it needs to be, there are always setbacks and things that can your score down. Remember, never overextend yourself. Living within your means is a big part of maintaining good credit. Just because a company offers you credit doesn’t mean that you should always take it. Be very cautious about opening and closing accounts. Working with a financial advisor can help you to ensure that you make good credit decisions and keep your score where it needs to be.