Your Credit Report: A Complete Guide
Credit report has the nuances that will help all the lenders discriminate between people who pay their debts on time from those who avoid repayment. The credit score is a number which determines the credibility of an individual. This is done by maintaining a record which consists of all the details regarding the transactions held by the individual or company. It also keeps track of any delay in payment or bankruptcy. Higher the credit score, higher is the probability of getting the requested amount of money.
This score is calculated by various methods depending upon the policies followed by individual countries. However, the most common methodology used in many global areas is the FICO which is abbreviated as Fair Isaac Corporation. The FICO is a public company that was founded in the year 1956. Besides the credit score, the company also provides analytics and decision making services to help several high profile financial companies.
Though the actual blue print to calculate the credit score has not been revealed, the FICO has disclosed the various components involved within.
The components involved are as follows: The first major element is the payment history, which if found in negative, shall affect the credit score in a significant manner as it contributes to about 35% on the FICO score. This is followed by credit utilization. It utilizes the ratio between the current debts incurred to the credit amount available to the individual. Lower the ratio, better the FICO score. This component contributes to about 30% of the FICO score.
There are 3 other categories which have a minor impact on the scoring. The first amongst them is the length of the credit history. The older the credit report, the better is the credit score as it finds stability in the individual’s financial status. The second element is types of credit used. Since there are different credit options available, a consumer can choose between the various offers. However, the use of a variety of choices can improve the credit score. The final component is recent searches for credit. Inquiries which are made very frequently can affect the score in a negative manner.
The FICO score ranges between 300-850 and the average score is 723. Besides this scoring pattern, there are several other scoring approaches available. Some of them are NextGen score, Vantage score and CE score. Amongst the 3 scoring methods, the first one was designed by FICO themselves. In order to curtail the growth of FICO, the other two scoring methods were born.
Since credit report gives the exact financial details about every individual in the country, it is offered to every citizen once every 12 months. This gives them an idea about their transactions and their credit score.
Thus a credit report is a value that helps you estimate one’s financial status. It is very important to have a high credit score as it helps in obtaining the required amount of money for your business. So what are you waiting for? Start working towards improving your credit score today!
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