Allen Moore

Allen

Moore

Loan Director at Credit Carma

Summary

How credit scores work

 

Your credit score is a very important part of your finance. There are three major credit agencies which calculate your credit score, TransUnion, Experian and Equifax. All of them will not always depict the same score but you can easily get a free copy of your comprehensive score from sites like www.creditkarma.com.

The figure which represents your credit score is basically a number which shows how good your credit history is. Why is it so important you ask? Well, having a good credit score is compulsory if you want to get credit here. Apart from this, a good score will also help you get better deals on your loans. It doesn't matter if you are talking about car loans, mortgages or any other loans, a higher credit score will always guarantee you a better deal on your loan. And if you have a lower rate of interest on your loan, you will end up having to pay much lesser for it in the long run.

But before I tell you about the importance of your credit score, let me give you a brief on how it is calculated:

1. A major part of your credit score (35%) is determined simply by your repayment history. This means that it you want to keep your score high you will need to ensure you repay all your debts in time.

2. Another major portion (30%) is allotted to the utilization of your credit. You should never ever use more than 30-40 % of your limit if you want to get additional loans. At the worst, let it go up to 50 %. But never more. If it crosses this mark, it is better to first bring it down before applying for additional credit. And no matter what you do, never close accounts which you have paid off. This will unnecessarily harm your utilization ration.

3. Another 15% of this figure is determined based on how long you have been utilizing credit for. Your credit score is going to obviously improve as the period for which you have taken credit increases.

4. 10% of your score will be based on the type of credit you have. It is always better to have various different types of borrowings.

5. And lastly, 10% of your score is going to be affected by the number of applications you have put in for credit in the past. If you just keep taking quotes without actually taking loans then it is going to negatively affect your score. So only ask for a quote if you are serious about taking a loan.