August 29, 2016 | Leave a comment A low credit score implies high credit risk to the lending companies and thus you will be unnecessarily subject to unaffordable fees, outrageously high-interest rates and sometimes the credit card companies may even reject your personal loan offers. Among all the credit score models, the FICO score is the most common one that is used by all lenders in the US. Why is credit score important? Credit score plays an important role when you’re planning to take out a loan for buying a home, starting a business or make a big purchase. You need to know that a credit score is a three-digit number that the lenders take into consideration before giving you any credit so as to be aware whether or not you’ll be able to pay off the amount that you are lending from them. As such, the banks and the different lending institutions will check your credit score before approving your loan request. What are the factors that make up your score? The credit scoring system has been made by Fair Isaac Corporation and is known as FICO score. The three credit bureaus – Equifax, Transunion, and Experian provide you a copy of your credit report free of cost every year. However, the credit score offered by the three credit bureaus may differ slightly from one another. When the credit reporting agencies determine your credit score, they take some factors into consideration. There are 5 important things that are taken into account. You need to be aware of the factors to outsmart the lenders and grab the best loan in the market. 1. Payment history (35%) 35% of your credit score is comprised of your payment history. Payment information on specific accounts, the severity of your delinquency, presence of adverse public records and the number of past due accounts are all taken into consideration to make the payment history. 2. Amounts that you owe (30%) Out of your credit score, 30% is constituted by the amount that you owe on all your credit cards. How many accounts are there with balance, the exact proportion of the credit line that you’re using and the total number of amounts that you owe on your installment loans are the factors that constitute the ‘amounts owed’ section. 3. Length of your credit history (15%) The credit bureaus will also check the time since you’ve opened all your credit card accounts and for how long they’ve been in operation. This is known as the length of credit history. 4. New credit (10%) The new lines of credit are taken into consideration to make up your credit score. The number of accounts that you’ve recently opened and the types are also considered by the credit bureaus. 5. Type of credit line that you’re using (10%) The variety of accounts that you use plays an important part in making your credit score. However, most credit experts recommend the debtors to use a mixture of accounts so as to boost their score. How do you remain creditworthy ? When it comes to cultivating a good credit score, there are many consumers who are still in the dark about what makes up their credit score and how they can boost the same. Educate yourself on some uncommon ways to increase your score. Pay bills before the statement date. The balance of your last statement date is the balance that is reported to the credit bureaus and therefore if you pay most of the bill before the statement date, you can lower the utilization ratio. Another way of boosting your credit score is to make periodic payments throughout the month. Save money by managing your personal finances and pay off your high-interest debts by utilizing your saved dollars. A spotless credit history with just two bad marks for late payment can be easily expunged if you ask your lender for a ‘goodwill deletion’. What you’ll be doing is to ask the creditor to cut you some slack. But if you’re habitually late, they’ll never agree. Final words The credit score will allow your lender to understand how you’ve managed your finances in the past and the risks involved in lending you the money. Thus, the more risky borrower you are, the less are the chances for the lender to give you credit. It is important that you build a good credit score and gain the trust of your lender so that he agrees to give you credit.