Credit scores

What are they?

A credit score is between 300 and 850 which shows the creditworthiness of a consumer. The
higher the score, the more the lender is interested in potential lenders. A credit score is based
on the credit history: number of open accounts, total debt level and history of repayment, and
other factors. Lenders use credit scores to assess the likelihood of a person paying loans
promptly. The credit score model is created by fico (fair Isaac corporation) which is the most
commonly used by most financial institutions.

Effect of credit score in real life?

A credit score can affect one’s financial life substantially. It plays an important role in the
decision of the lender to offer credit. For example, people with a loan value below 640 tend
to be subprime borrowers. To compensate for carrying more risk, lending institutions often
charge interest on subsidiary loans at a rate higher than a conventional mortgage. They may
also require a shorter reimbursement period or a co-signer for credit-low borrowers.

What are the optimum credit scores?

Generally, a credit score of 700-800 is considered good and people with such a credit score
can get loans much easier than the people with lower credit scores and also pay less interest
on the loan as they are a low-risk carrier for the bank. The credit score can also sometimes
contribute to the decision of how much a person has to deposit to get some amenities like
renting an apartment

What are the factors that affect credit scores?

5 factors are affecting the credit score of an individual: -

1. The most important factor that affects your credit score is payment history which
affects the credit score to almost 35%. Lenders are interested in what is your
payments history on all your accounts, the duration of your positive credit history and
how long you have been without a negative item, the number and seriousness of your
credit histories of offenses, and whether serious unpaid debts are present, such as
bankruptcies and foreclosures.

2. The credit score is heavily influenced by the amount of debt one has as it accounts for
30% of the influence. A high ratio of credit balances to credit limits, as well as a large
number of credit accounts, might have a negative impact on your credit score. The
amount of debt on each account, as well as the amount of debt paid off on term
 accounts, have an impact on your credit score. Making periodic payments and
repaying instalment loans are two ways for consumers to demonstrate accountability.

3. Higher credit ratings are associated with longer credit histories. It has 15% influence
on the credit scores. The length of credit history, the amount of time certain accounts
has been open, and the period since each account was last utilized are all important
elements in credit ratings.

4. Credit ratings also take into account the amount of new credit you are taking on. It has
10% influence on the credit scores. Credit scores follow consumers who take on
additional debt unexpectedly and potentially overextend themselves by looking at
when and how many accounts a consumer has created in the past, as well as the
amount of inquiries on their credit reports.

5. The type of credit you have plays an important role in determining your credit score.
A “healthy mix” of installment loans and revolving credit from banks is considered
better for your score. It has 10% influence on the credit scores.