In order to start repairing your credit and improve rating, it is important to have a basic understanding of how your rating is calculated. This in turn will help you understand what you are supposed to do and why.
While different agencies have different reporting systems, FICO is the industry standard and one which most lenders use.
Your credit score, also known as credit rating, is a number between 300 and 850 that summarizes your risk of default. If is also referred to as a FICO score simply because Fair Isaac company developed it.
There is also the Vantage score offered by TransUninon and Experian agencies, but which is currently not the industry standard.
If you don’t know your credit rating, you will have to get one. And while you can get your reports at least once a year for free, your score does not come free. You can only get your FICO score from two companies, MyFico and Equifax.
How is Your Credit Rating Calculated?
More or less it works like a school progress report chart where different percentages are given for fixed category of work you have done; your score will count your standard finally with the total percentages you received.
Approximately 35% is counted according to the payment procedure you have paid back to the lenders. This means the amounts, dates, items in collections and how many late payments have been made etc. Paying on time is the key component here.
Next 30% goes for the debt compared to your limits; that is how much you owe compared to how much credit is open to you. In order to have a good score, you need to have used 30% or less of your total credit limit. This means that if you have $1000 limit, for example, you should keep your balance at $300 or less.
As you can see, it is possible to raise your credit score almost instantly by reducing your credit utilization, payday loans or raising your limit. This is assuming that you continue to or start making payments on time.
This time factor deals with only 15%. This means the length of time you have been using credit.
Another 10% deals with variety. A “healthy mix” of credit types is what is desired. For example, if most of your credit is in form of “revolving credit” such as credit cards, your score will most likely be lower than someone with a credit card, a car payment and a mortgage.
Last but not the least percentage deals with all the recent credits you are dealing with. This includes new credit cards and line increases requested by you. Too many new accounts are considered unhealthy.
Of course, the above are just basics to help understand the workings of the system.
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