Your Credit Score: A Guide To Better Understanding It

A credit score is simply a number that is used to describe your financial situation. This number is what lenders use to determine if you should be approved or declined credit. Credit is a big part of life, which is why taking care of your credit score is so important. However, to be able to take care of your credit score, you need to gain a better understanding of what it is and how it works. In addition to the steps that you need to take to keep it ‘healthy.’Better understanding your great score

To learn more about your credit score, it can be helpful to get an idea of the bigger picture and the role that credit scores have in our lives, have a read of the guide below. (It should give you all the insight that you need to properly take care of your credit score and ensure that it remains at a ‘healthy’ rate).

Credit score basics

The idea of credit scores is a simple one – they are designed purely to make it easier for lenders to determine whether an applicant is a suitable candidate for credit. When it comes to loans, banks and lenders want to know whether it is likely that you will default on payment of a loan, which is where your credit score comes in.

You see, if your credit score is low, and has factors like missed payments or defaults listed on it, this indicates that you are likely to default on payments, making you an undesirable candidate for a loan. Whereas, if your credit score indicates that you borrowed money from the bank to start your business and paid every penny back on time, this is seen as being a positive thing. However, if your credit score shows that you made some payments late or defaulted on them altogether, this is seen as being a negative thing and will have a detrimental impact on your credit score and ability to gain credit. The good news is, however, that credit scores can be repaired with the help of specialist credit repair companies like Credit Marvel. However, the repair process can be a somewhat lengthy one and doesn’t happen overnight.

In the past, lenders had to manually read through pages and pages of information for each applicant. Today, however, the internet and online credit checking websites have made it quicker and easier than ever to check an applicant’s credit score and determine whether they are a desirable candidate for credit. Computers read all the information about a candidate, combine it, and chooses an appropriate score in relation to that information.

What are credit scores made up of?

What credit scores are made up of does depend on the credit scoring company. However, as a rule of thumb, most credit scores are made up of these similar factors:

  • Payment history – what is the applicant’s payment history like, is it positive or negative? Are there missed payments or defaults?
  • Money owed – does the applicant owe any money? If you are in debt, this significantly impacts your credit score and financial health and can be the reason why your application for credit is denied.
  • Length of credit – is borrowing money new to you or do you have a positive history of borrowing and paying money back?
  • New credit – do you have any new credit or have applied for numerous loans over the past few months and been declined?
  • Type of credit – do you have a healthy combination of different kinds of debts (home, car, bank, etc.)?

It is a combination of these factors that make up your credit score and determines your ability to ascertain credit.

What can be detrimental to your credit score?

When it comes to your credit score, there are certain behaviors that can be incredibly detrimental to it and can harm your ability to get credit in the future. These include things like:

Taking out numerous credit cards. If you have numerous credit cards and owe money to a range of different lenders, even if you are paying these accounts off each month, this behavior can still be detrimental to your credit score. It’s better to have one or two credit accounts and stick to using those two each month.

Have you applied for credit and been declined? If you have recently applied for credit and been declined, this can have a negative impact on your credit score. That’s why it’s best to never apply for credit that you aren’t sure if you can get before talking to a financial advisor, to ensure that applying for credit is a good move to make.

Missing payments. If you make the mistake of missing any payments for your monthly accounts, from your credit card to your mortgage, this can have a hugely detrimental effect on your credit score. If you want to keep your credit score healthy, you must ensure that you remain up to date with all of your monthly payments. If a payment is missed, it can be registered on your credit score as being late, or if missed completely, as a default which stays on your credit record for six years.

Being self-employed. Did you know that being self-employed can harm your credit score? The fact is that if you are self-employed, you have a much lower chance of having a high credit score. However, that doesn’t mean that you won’t be able to ascertain credit because that isn’t the case. Once you have at least two years’ worth of accounts, you have a much higher chance of having a healthier credit score. So before applying to take out any credit, it is vital that you ensure you have two years’ worth of accounts listed.

Credit scores are complex things that can have a big impact on your ability to ascertain credit. The problem with these numerical scores is that if something goes wrong and your credit score takes the hit, it can take years to repair itself. Meaning that for this period, ascertaining any credit can be difficult. That’s why knowing how to take care of your credit score is so important.