What is Credit Score?
These days we hear a lot about credit and credit scores. It means a lot especially now when there is a financial crisis going on. Having a low credit score can mean a great deal now. So how does it work? How can these scores affect our financial lives?
How is Credit Score Calculated?
To put it simply, this score is obtained by using data found on your credit report. The three major credit bureaus, namely Experian, Equifax and TransUnion all use the FICO method in computing the score. Coming up with the score is similar to your grading system in school. The teacher gives grades to all aspects of your performance at school and then gives you a final grade. The lenders do the same thing; in this case, they assess your performance according to the report from the credit bureaus.
The Higher the Number the Better
The score would range from 300 to 850 and the higher the number, means the better your performance. The exact FICO method is owned by a private company so it is secret, but here is an approximate breakdown of how they come up with the score.
The biggest percentage of the score is your payment history. This is the biggest portion because the most important information for lenders is how well you pay back your debts and financial obligations. If there is one portion of your credit report that they would want to look into then this is it.
Your Outstanding Debts
A third of the score is based on the outstanding debt that you have. How much do you still owe? If you have several credit cards that are within their limits already then that would pull down your score a lot. The best practice is to keep your credit limit within 20-25% only.
Credit Accounts and New Credits
About ten percent of the score is based on any new credit that you might incur. So if they see that you took on a new credit recently then that would pull down your score considerably. The rest of the score is based on the kind of credit accounts that you have. Lenders would prefer to see certain kinds of loans on your report more than others.
What about Bad Credit?
This is the method by which your credit score is determined. That number which has so much effect on your life. Now if you have a bad score then your chances of getting some quick sources of money is cut down. The good news is that there are bad credit payday loans. You can take advantage of these loans even if you have low scores.
Your Paycheck Matters More Than Your Credit
Payday companies will always check your credit. They use different agencies or databases. Checking credit is an essential duty of a lender. But… Even if you have bad credit, a lender may approve your application as long as you have a decent income. If you have held a steady job for a number of years, you stand a good chance of getting a loan.