WHAT CREDIT SCORE, WHAT IS IT, AND HOW TO GET IT?
It is very important that you know your credit score. This is because the number reflects the financial opportunities that you may have in your life.
Luckily, there are several ways to improve your credit.
In this article, we will give you all the information related to this credit score so that you can take your financial future into your hands.
What is a credit score?
A credit score is a qualification based on a financial report that helps banks, cooperatives, and finance companies to estimate what your particular economic situation is.
In general, it will determine how you could get to solve the respective payments of loans or other types of credits.
They also provide visibility of how responsible you are in terms of your expenses and payment control, essential data for the approval of your loan applications.
What do credit scores mean?
These credit scores determine how viable your profile is to receive a new loan.
Poor credit (from 300 to 579 points): This score does not allow you to be a creditor of the financing instruments.
Regular (from 580 to 669 points): It will let you qualify for more financing without these being the best.
Good (from 670 to 739 points): It is the standard, where credit becomes accessible and interest rates can be low.
Exceptional (800 to 850 points): A score of more than 800 points is considered the best.
Each one also determines the type of interest and the magnitude of the savings that you can have when acquiring loans. How To Check CIBIL Score?
What is the relationship between your score and the interest rate?
Your score is one of the main factors in determining the interest rate.
A higher score means you are a lower-risk borrower, which could lead to a lower interest rate on your loan.
A lower score means you are a higher-risk borrower, which could lead to a higher interest rate on your loan.
The relationship between credit scores and interest rates can be complex.
But understanding how they are related can help you make the best decisions for your financial future.
If you have a high credit score, you will generally get better loan terms, including a lower interest rate.
This is because lenders view you as a low-risk borrower, someone who is likely to repay the loan on time.
Credit score table: risks and interests
This table shows the risk lenders perceive based on different credit score ranges when offering an unsecured business loan.
|credit score||Range||risk||Approximate Annual Interest Rate|
|721 or more||excellent||low risk||6% to 12%|
|681 of 720||well||Low to medium risk||12% to 19%|
|641 of 680||Regular||medium risk||19% to 25%|
|600 of 640||Bad||Medium to high risk||24% to 60%|
|599 and under||very bad||high risk||40%+|
|No prior credit score||Non-existent||Medium to high risk||25% to 60%|
You should keep in mind that ultimately, the best way to help improve your credit score is to use and make timely payments on loans and credit cards.
When applying for a business loan, your personal credit score can be just as important as your business credit score.
How does your credit score affect you?
The consequences of having a bad or a good credit score impact the following economic areas:
- Rent or buy housing. To apply for a rental with a real estate agency or apply for a mortgage, it is required to have a good FICO or VantageScore credit score.
- Apply for a credit card. It is essential to have at least a good payment history.
- Insurance and auto loans. Insurance companies must confirm that their users can pay their debts and keep their risk low.
- Telephone and other home services. Some service providers require good credit scores from their customers to avoid paying deposits.
Filing bankruptcy can also affect your score.
Where can I get my credit score?
By law, you have the right to request your credit report annually and free of charge from any of the three main agencies in the United States: Equifax, Experian, and TransUnion.
Although you can purchase a FICO score report at myfico.com, more and more banks are offering this service for free.
Bank of America, among others, often takes advantage of their online banking to give you access to your score whenever you need it.
There are also other sites, like CreditKarma or CreditWise, that let you open free accounts to check your credit score.
How to make credit for the first time?
Assuming you don't have a credit history, there are a few things you can do to start building your credit.
One option is to get a secured credit card, which is backed by a deposit you make upfront.
This deposit acts as a guarantee in case you default on payments, making it easier for issuers to approve this type of card.
Another option is to become an authorized user on someone else's credit card account.
This means that the primary cardholder agrees to your use of their account and makes you responsible for any charges you make.
If the cardholder has good credit, this can help you improve your own credit score.
You can also consider the possibility of requesting a small loan from a financial institution or using a loan platform.
Where do credit scores originate?
The credit bureaus (Equifax, Experian, and TransUnion) are responsible for calculating credit scores.
Each one has a different mathematical formula to determine the digits of your score.
They generally take into account your history of direct debit payments or payment of services, your debts, and everything you pay with cards.
How is the credit score calculated in the USA?
The most relevant credit scores in the United States are VantageScore and FICO.
These are calculated with different formulas but are based on very similar factors.
Your credit score is made up of 5 factors:
Your payment history is the most important factor in your credit score. It represents 35% of your score. Lenders want to see that you have a history of making timely payments.
If you have late payments or collections on your credit report, it will hurt your score.
Credit utilization ratio
Your credit utilization ratio is the second most important factor in your credit score. It represents 30% of your score.
Your credit utilization ratio is the amount of debt you have compared to the total amount of credit available.
For example, if you have $10,000 in credit card debt and $20,000 in available credit, your credit utilization ratio is 50%.
Experts recommend keeping the credit utilization ratio below 30%. Anything above that can start hurting your score.
Length of credit history
The length of your credit history is the third most important factor in your credit score.
It represents 15% of your score. Lenders like to see a long history of responsible lending and repayments.
If you have a short credit history, it won't necessarily hurt your score, but it won't help as much as a long history would.
Types of credit accounts
Your mix of credit accounts is the fourth most important factor in your credit score. It represents 10% of your score.
Lenders like to see a mix of different account types, such as revolving accounts (such as credit cards) and installation loans (such as mortgages).
Having a mix shows that you can handle different types of debt responsibly.
New credit applications
The fifth and final factor in your credit score is new credit applications. This factor only accounts for 10% of your score, so it's not as important as the other factors we've discussed.
Lenders like to see that you don't open too many new lines of credit at once because it can be an indication that you are experiencing financial difficulties or trying to rack up debt quickly.
However, opening one or two new lines of credit in a 12-month period does not typically have a significant impact on your score, as long as you manage those accounts responsibly.
How to make fast credit and improve it in the USA?
Next, tips and techniques will be presented that will answer you how to make credit in the USA as quickly as possible and with the greatest number of points.
Report your rent
If you are renting a property in the United States, surely the property manager is not reporting your rental payments to the agencies.
For example, when you start reporting your rent you may experience an increase in your score of more than 50 points in a few weeks.
At Experian, you will find more information on how to report your rental.