How important credit scores are? “Credit scores have become one of the most important numbers in the lives of Americans,” Stephen Brobeck, executive director of the Consumer Federation of America said. “Employers increasingly study prospective employees’ on their credit scores so that they could judge their capacities for “personal responsibility,” Brobeck says.
Insurance premiums can be determined through the scores. A high credit score could provide discount premiums, while a low credit score could mean additional annual premiums. Future loans would be approved if the bank or lender determines credit worthiness through a high score. Lower credit score can cause the bank to provide the borrower lesser credit limit and higher interest rates. For lease contracts, a landlord could determine whether he can trust his premises to another person. If the person who is about to rent the premises has a high credit score, the landlord would assure continuous rental payments. If found with a low score, either he would withdraw the contract or lessen the lease term.
What are they looking for? Debtopedia.com outlines five credit factors that are critically reviewed by lenders before approving the loans. These are: Payment history of the debtor, When the debtor pays the bills, Amount of the outstanding debt the debtor has, The length of the credit history and Recent credit applications. With these factors in mind, the debtors or credit card holders must find ways to make themselves look trustworthy. These factors would be able to tell debtors the specific ways on how to not lower the credit score and increase it to a more acceptable score.
How are these scores computed? The formula used has been regarded as one of FICO’s secret asset. But FICO revealed the factors used in computing for the score and the weigh each contribute for the computation. 5% Payment History, 30% Amounts Owed, 15% Length of Credit History, 10% New Credit and 10% Types of Credit Used.
The amounts owed or the “utilization ratio” comprises the heaviest weigh on the score. The lower the ratio gets the higher the score. This is determined by dividing the amounts owed by the credit limit available. This area emphasizes the need for the debtor to pay-off his debt or increase the credit limit to reduce the utilization ratio, thus in turn increase the credit score.
Lenders don’t limit themselves with FICO scores and VintageScores. They can assess credit worthiness through their own method. They may add more factors to the above or reduce them to their own accord.
What increases my credit score? Scores are increased through early or on-time bill payments. Furthermore, scores goes higher if the debts are reduced or the credit limit is increased. A long credit history determines a chain of default risk-free credit cases, making the present credit loan and future credit loans likewise risk-free.
