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What is a credit score?

A credit score is generally defined as a numerical figure that determines a customer’s creditworthiness based on their credit history. A credit score is usually based on a credit report, which is fueled by a credit bureau. Lenders such as firms, banks, governments, and credit card companies evaluate the potential risks of lending out money to a source, minimizing their bad debts and make credit score comparison. Credit scores range between 300 to 850, consequently the better the score, the more trustworthy a person is considered to be. Consumers can possess substantially high credit scores by maintaining a stable and long history of paying their bills regularly and punctually and keeping their debt minimal.

A credit score may change regularly. Borrowers may pay down credit cards, pay off loans and open new lines of credit. Customers may abstain from making new credit requests or pay their outstanding payments to keep a relatively high score. Customers should not close their credit card accounts.

The credit score model was first initiated by the “Fair Isaac Corporation (FICO)”. Lenders and firms usually take into account FICO scores and various other credit reports to determine the customers’ credibility. The company claims that 90 percent of top U.S. lenders use FICO scores whilst their decision-making process. The five main elements that go into calculating the credit scores by FICO are listed down below:

  • Payment History

This refers to the punctuality with which the customers pay his receipts. Customers paying back their credit amounts way before the deadline tend to have a higher score. These reports also indicate that if payments were received late, were they received 30, 90, 120 and more late days. This helps the firm to determine and analyze in greater detail.

  • Accounts owedA

This is known as the money that a person owes. FICO evaluates this component based on the money ratio owed to the credit amount available. To add on, having a considerable amount of debt does not necessarily indicate a low score, we will explain how later.

  • Credit history

According to the general rule, the longer the individual has credit, the better his score tends to be.

  • Credit mix

Refers to the dissimilar kinds of accounts that are incorporated in a customer’s credit report. The different kinds of credit that might be part of a consumer’s credit mix contain credit cards, automobile loans, student loans alongside mortgages. Having a mix of different types of credit can, for sure, have a positive impact on your overall score.

  • New Credit

It is known as the accounts that have been opened recently. If a borrower has a significant number of accounts opened up in a short time, that specifies risk, and hence the score is lowered.

The FICO score range is as follows:

  • Excellent: 800 to 850
  • Very Good: 740 to 799
  • Good: 670 to 739
  • Fair: 580 to 669
  • Poor: 300 to 579

People with credit scores of 640 and below are considered to be very risky borrowers. They usually have a thin credit background. In contrast, people with credit scores of 700 and above are generally considered very trustworthy and hence have to pay lower interest rates throughout their loan.

A bad credit score refers to a person who faced a bad history of paying his debts punctually. A company can also have bad credit based on its adverse financial situation. A person with a bad score may face difficulties at borrowing money, especially at competitive interest rates just because they are considered riskier than other borrowers. Here are some important steps that you can take to improve bad credit: set up automatic online payments, pay down credit card debt, check interest rate disclosures and keep unused credit card accounts open.

When you set up automatic online payments, you ensure that you pay at least the minimum on time every month. You should do this for all your credit cards and loans, if you are unable to do so, make sure to either get the calls or texts turned on.

Making payments before the minimum due whenever possible can definitely improve your score.  By this method, of paying down credit card debt, you should determine a realistic payment goal that you should thrive to fulfill every month. Paying more than the minimum amount due can also increase your score.

After checking the interest rates disclosures offered by credit card companies, you should pay off the highest interest rate debt the fastest. This will eventually increase the cash, which you can begin to apply to low-interest debts.

Either opening new credit card accounts or closing old ones, both the moves can damage your score by a considerable amount, so you have to make sure not to do any of them.

Credit scores do not stay constant over time. The score you had one month ago will not be the same as of yet. Hence, the regular calculation of scores is needed. This method of calculating scores, FICO was invented in the 1950s, but there have been more methods of calculation that are gaining popularity lately. Equifax alongside TransUnion and Experian collaborated to create “VantageScore” to offer more scoring consistency among the bureaus. Remember whatever agency you get your scores calculated from, they will never reflect information such as race, religion, marital status, gender or sexual orientation, so discrimination will hopefully not take place.


To conclude, because each bureau may have different information regarding your credit history, the scores calculated may be different. Scores may also be different due to an error or mistake during the calculation, and if you have any doubt regarding them, you can always request a re-calculation. Remember to check your reports regularly and turn on your notifications to be notified regarding updates to either your personal information or your scores. Throughout this process, make sure to be consistent and diligent in whatever decision you make, or else it’s going to cost you substantially!

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