Your credit report is summarized in three digits and it is otherwise known as credit score
. Having a low credit score will lead your application for loan, credit card or insurance to be denied. This score is how your lenders will predict your creditworthiness or whether or not you will be a good payer in the future. It is computed using a method developed by Fair Isaac and Company (FICO) or its variants.
Three major Consumer Reporting Agencies (CRA) that are known to have worked with Fair Isaac to develop the FICO scoring methods in the 1980s. These companies are Equifax, Experian and TransUnion. Up until today, these companies have maintained dominance over the credit reporting world and they hold the largest credit reports. These three may have your credit report and to get a copy from all three is called a 3 in 1 credit report.
How does the FICO compute for your credit score? The formula and the complications that go with it are only known to Fair Isaac and Company but we can have an idea by breaking it down to percentages. Your credit history accounts for 35% of the score and this will reflect how prompt you are on paying your bills. Your outstanding debt is 30% of the score so remember to keep your credit card balances at 25% or less of your credit limit so that your score would not suffer.
How long have you had credit is 15% of your score and the tip here is to keep an established credit for a long time for a longer credit history and a more accurate prediction. New credits account for 10% of the score and the other 10% account for the types of credit that you currently have. These percentages are what you should remember when you view credit report so that you will have an idea which of the categories you should improve on in order for your score to get better.
Your score will range from 300-850 and the lower your score is, the more your creditors will read you as a credit risk. This will result to either a denial of your loan application or your creditors giving you a higher interest rate. However, you must keep in mind that these scores are not fixed. There are a lot of things that you can be doing to improve your credit score so as to increase your chances of getting your loans approve without too much hassle. Start, of course, by reviewing your credit report before applying for a loan, insurance, etc.