Credit score is actually a numeric three digit number which proves your creditworthiness to the lenders. It is a statement showing your credit transactions in the past seven to ten years and includes all open and closed lines of credit in your name. The credit report is mostly dependant on your repayment history i.e, your consciousness in repayment of the loans. This credit score is also called the FICO score as it was developed by Fair Isaac Corporation and is offered by the three major credit reporting agencies (also known as credit bureaus) of US – Experian, Transunion and Equifax. The scores offered by each of the credit bureaus may sometimes differ by a few points because the creditors may not report information to all the bureaus at the same time.
The items in your credit report generally fall under the following heads. They include your personal information, potentially negative items, accounts that are in good standing, and hard inquiries conducted in your credit report. Your personal information includes your name, a few digits of your social security number (for security reasons) and your date of birth. Negative information may include the public records such as judgments and bankruptcies, and outstanding debts with the creditors and finally hard inquiries in your report may include the names of the creditors who have pulled out your credit report in the last two years to check your credit history to judge your credit worthiness.
The FICO scoring model has been developed in the 1950’s by the Fair Isaac Corporation to determine the eligibility of the borrower in opening a new line of credit. The score has a range from 350 to 850 points, with higher score increasing your potentiality as a borrower. The higher is your credit score, the lower is the interest rate on your loans. So it is always essential that you improve your score. The score can be increased by keeping in mind the factors that determine it. The FICO score is based on five parameters which include the following:
- Credit history: It has a significant role to play in improving your score since it contributes 35% in your FICO score. So in order to improve your score you need to build up a good credit history. For this all you need to do is to make purchases with your credit card and repay them back within the due date. You should not make defaults on your other loans, or make any missed payments, if you want to improve your score.
- Length of the credit history: It has a contribution of 15% in your FICO score. So you should always try to increase the length of the credit history in order to improve your score. For this, you should not close any existing credit cards which have a good credit history. If you are unable to maintain your cards and you want to close some of them, it is better that you close the newer ones.
- Amounts owed: This is also a major factor in determining your credit score as it contributes 30% in your score. So to make this factor contributes positively in your score, you should always make sure that you do not exhaust more than 30% of your credit limit on your cards.
- New credit: It includes number of new lines of credit and hard inquiries in your credit report. When you apply for a new line of credit, be it for credit cards or other loan application, the creditor pulls out your report. This is called a hard inquiry. A hard inquiry may lower your FICO score by 5 to 10 points. Hard inquiry reflects your hunger for credit and so it lowers your score. So you should limit your credit application as far as possible in order to improve your credit score.
- Types of credit used: 10% of your credit score is contributed by this factor and includes the different types of credit you have already taken.