It is essential to have an in-depth understanding of credit scores, and that is because simple financial mistakes you make could be very costly to your future. Credit scores increase your chances of owning an apartment or being given a loan by money lenders. The fact is that every lender needs an assurance that you can pay back the investment they’ve given you.
Many people find credit numbers to be very confusing because of misinformation. Some also assume that they have good scores, while in reality, they are not right. The reverse is also very accurate. That is why it is essential that you take your time and fully understand credit scores.
What a Credit Score Is
Creditors and landlords can only gauge your ability pay by checking your credit score. A credit score refers to the number obtained after assessing your financial behavior. It represents your history of borrowing and paying back the money.
The logic is simple in that the higher the score, the higher the chances of getting a loan, opening a utility account, or renting an apartment.
A poor score could mean the denial of the above services or a very high-interest rate if you happen to get the loan. However, if you are struggling, don’t worry, visit https://www.boostcredit101.com, who will help you right the wrongs and improve your numbers.
Landlords would always prefer to hand the keys to a tenant with excellent credit reports. A poor score would only dim your dream of owning an apartment.
Difference Between Credit Scores and a Credit Report
Even though credit scores and credit reports are closely related, they are very different. Credit bureaus collect credit reports. They entail your personal information, for example your name, address, opened and closed credit card accounts, and bankruptcies.
On the other hand, credit scores are calculated from the credit reports by the bureaus, which are then shared with the banks, lenders, and other organizations.
How Credit Scores Are Calculated
It is essential to know how the credit scores are calculated so that you can understand the factors that may lead to a poor credit score. The score is usually out of 100 percent and is broken down as follows;
Loan Payment – 35 Percent
Payment of debts in time not only helps you to avoid a penalty but also has a significant impact on your credit score.
Debts – 30 Percent
Your credit utilization ratio refers to the ratio between the total debt that you have compared to your full available credit. Always ensure that the rate is below 30 percent.
Length of Credit History – 15 Percent
The longer the credit history, the better.
Credit Mix – 10 Percent
Diversity of your accounts boosts your credit score because it shows that you can handle a variety of debts. But it is important to note that for it to have a positive impact, your accounts need to be in good standing.
New Credit – 10 Percent
Opening many new accounts within a short period raises a red flag that you may be struggling financially, thereby lowering your credit score. Luckily, it has a minimal impact on your score.