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Salient features of one’s credit score

Every person knows this, “If my credit score is bad, it is considered a disaster.” While it is certainly not the end of the road, it does create many a roadblock on one’s long journey called life. There are many online platforms that offer help to those of us with poor credit score, but it certainly comes at a price. The prudent thing to do is to know what is the bugbear called credit score and how to keep one to keep in comfortable numbers. An organization called Fair, Isaac and Company (FICO) are a data analysis company based in San Jose, California and specialize in credit scoring services.

The company was founded by Bill Fair and Earl Isaac in 1956. Fico Score has become the fundamental measure of risk evaluation in the financial services sector in the country. FICO is extremely secretive about the details of their methodology; however, they have made public the weight they give to the various factors that go into its calculations. One’s credit score is a cumulative number to rank one against the others in creditworthiness. The most important factor is payment history, which gets 35% weight. Payment history is the records of one’s lapses in making timely repayments of loans, credit cards, mortgages or any other borrowings one has done. In other terms, how regular one is in making repayments in time.

The second input in importance is the amount owed. This measures the amount of loan one has used against the total loan available. It is also called the utilization ratio. Lenders feel that those who exhaust the loan are less likely to repay the loan, and this gets 30% weight. The next is the length of history, which gets 15%. This is the average age of the account as well as how long it is from the last time one has made use of the loan. The next input is new credit, which is the frequency at which one has applied for loans; it gets 10%. The last is types of credit, wherein the mix of loans one has are considered, getting 10% weight. Lenders like to know one’s capacity to responsibly handle different kinds of loans.

You will ask, “But what exactly is the significance of my credit score?” and “How does my credit score affect my life?” or even “What is the average credit score that I can measure my credit score against?” The understanding of these aspects of credit score makes one aware of its importance and helps him/her keep the numbers in a healthy range. Experian, a credit reporting company, studied 3 million credit profiles and found that the score varied from 380 to 880 and that the national average is 687. The state of Minnesota has the highest score of 718. There three major credit bureaus, Equifax, TransUnion, and Experian, to which lenders, bankers, credit card companies and other businesses report the repayment and other credit details of their customers. On the basis of this information, these agencies make their report and send it to FICO, who in turn make the FICO credit score of the individuals. Higher one’s score is, more trustworthy the individual is. Hence, lenders, financial, companies who deal in mortgages, etc. have more belief that the individual with a high credit score is less likely to falter at repayments and, therefore, give more attractive rates for them. Conversely, an individual with a lower credit score is more likely to falter at repayment; therefore, agencies are taking higher risks and charge more interest rates and put more restrictions on the deals.

It is prudent to remain in the safer credit score regimes than to get a low value due to undisciplined financial behavior and later trying to repair the situation. When one is under heaps of debt, it is extremely difficult to manage to come out of the trap. New resources come with severe penalties, and it is very hard to keep up with repayment schedules. Having a poor credit score is not the end of the world, there are companies and online platforms who have associates who specialize in lending to poor creditors. If one can mend one’s way, he/she can gradually rebuild their credit score.

There are banks who allow customers a checking account facility without an entry fee or requirements of maintaining a minimum balance and not allowed overdraft facility. They reward accounts by giving cash back on debit card use to help build deposit balance. They have accounts where the interest rates are compounded on daily basis. The banks insist on a small minimum balance to help one learn thrift. Often, there is a provision to upgrade the account to a more liberal one on showing improved financial behavior. Credit card companies issue debit cards to people with poor credit score with conditions to help the holders improve their behavior and credit score in the long run.

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