The Knowledge about Your Credit/Cibil Score
What Is a Credit Score?
A credit score is a number ranging from 300-850 that depicts a consumer's creditworthiness. The higher the credit score, the more attractive the borrower. A credit score is based on credit history: number of open accounts, total levels of debt, and repayment history. Lenders use credit scores to evaluate the probability that an individual will repay loans in a timely manner.
How Credit Scores Work?
A credit score can significantly affect your financial life. It plays a key role in a lender's decision to offer you credit. People with credit scores below 640, for example, are generally considered to be subprime borrowers. Lending institutions often charge interest on subprime mortgages at a rate higher than a conventional mortgage in order to compensate themselves for carrying more risk. They may also require a shorter repayment term or a co-signer for borrowers with a low credit score.
Conversely, a credit score of 700 or above is generally considered good and may result in a borrower receiving a lower interest rate, which results in their paying less money in interest over the life of the loan. Scores greater than 800 are considered excellent. While every creditor defines its own ranges for credit scores, the average FICO score range is often used:
Excellent: 800 to 850
Very Good: 740 to 799
Good: 670 to 739
Fair: 580 to 669
Poor: 300 to 579
why is a credit score important?
Why Your Credit Score Is Important. Your credit scores determine a lot more than the loans you can get and the interest rates you pay. Insurers use credit scores to set premiums for auto and homeowners coverage. Landlords use them to decide who gets to rent their apartments.
You can leverage great scores into great deals — on loans, credit cards, insurance premiums, apartments and cell phone plans. Bad scores can hammer you into missing out or paying more.
The lifetime cost of higher interest rates from bad or mediocre credit can exceed six figures. For example, according to interest rates gathered by Inform Research Services:
Someone with scores in the 620 range would pay $65,000 more on a $200,000 mortgage than someone with over 760.
On a five-year, $30,000 auto loan, the borrower with lower scores would pay $5,100 more.
A 15-year home equity loan of $50,000 would cost a low scorer $22,500 more than someone with high scores.
Since credit scores have become such an integral part of our financial lives, it pays to keep track of yours and understand how your actions affect the numbers. You can build, defend and take advantage of great credit regardless of your age or income.
How credit scores work?
We depend on credit for so many important things in life -- whether it's for buying a car, house or computer or getting a student loan. A three-digit number -- your credit score -- can determine whether you can do these things and even how much it will cost you.
How can a simple number determine whether you can buy a house or car? If you've read How Credit Reports Work, you know that your credit report contains a history of how you've paid your bills, how much open credit you have, and anything else that would affect your creditworthiness. Your credit score boils down all of that information to a three-digit number. Using the credit score, lenders can predict with some accuracy how likely the borrower is to repay a loan and make payments on time. It's how electronics and department stores can offer instant credit.
This incredibly important number, which affects how much you pay for credit, insurance and other life necessities, used to be hidden from consumers. Until recently, only lenders and other businesses that used the score could access it. Fair Isaac and Company, which developed the score, felt that the score would only confuse consumers since there was nothing to tell them what it meant or what lenders were looking for.
In 2001, however, all of this changed due to pressure from the U.S. Congress and industry and consumer groups. Now you can view your credit score -- for a fee -- from credit reporting agencies and credit monitoring services.
But to help us understand that number and ultimately know how to improve it, we'll need to find out how it's calculated.
Simple Steps to Repair Your Credit and Increase Your Credit Score
Review your credit reports.
Another way to see your credit reports is to use a free service like Credit Karma. (I'm not endorsing Credit Karma. I like it and think it's handy, but I'm sure other free services are just as useful.)
Once you've signed up, you can see your credit scores and view the information contained on the reports. Generally speaking, the entries on the different reports will be the same, but not always. For a variety of reasons credit reports are rarely identical.
Dispute negative marks.
In the old days, you had to write letters to the credit bureaus if you wanted to dispute errors. Now services like Credit Karma (again, I'm not endorsing CK and only reference it because I've used it) let you dispute errors online.
Just make sure you get the most bang for your dispute efforts. Certain factors weigh more heavily on your credit score than others, so pay attention to those items first.
Start with derogatory marks like collection accounts and judgments. It's not uncommon to have at least one collection account appear on your report. I had two from health care providers I used after having a heart attack; my insurance company kept claiming it had paid while the providers said it had not, and eventually the accounts ended up with a collection agency. Eventually I decided to pay the providers and argue with the insurance company later, but both collections wound up on my credit report.
Fixing those problems was easy. I clicked the "Dispute" button, selected "The creditor agreed to remove my liability on this account," and within a week the dispute was resolved and the entry was removed from my credit report.
Keep in mind some disputes will take longer than others. But that's OK. Once you initiate a dispute, you're done: The credit bureaus are required to investigate it and report the resolution.
Spend as much time as it takes trying to have derogatory marks removed because they also weigh heavily on your overall score.
Dispute incorrect late-payment entries.
Mistakes happen. Your mortgage lender may report a payment was late that was in fact paid on time. A credit card provider may fail to enter a payment correctly.
You can dispute late payments -- whether in accounts that are current or accounts that have been closed -- the same way you dispute derogatory marks.
Your payment history is another factor that weighs heavily on your credit score, so work hard to clean up those errors.
Decide if you want to play the game some credit repair companies play.
So far we've discussed trying to remove inaccurate information only. You can, if you choose, also dispute accurate information.
For example, say an account went to collection, you never paid it, and the collection agency gave up. All that remains is the entry on your credit report. You can still choose to dispute the entry. Many people do. And sometimes those entries will get removed.
Why? When you enter a dispute the credit bureau asks the creditor to verify the information. Some will. Many, like collection agencies, will not. They'll simply ignore the request -- and if they do ignore the request, the agency is required to remove the entry from your credit report.
What that means is that smaller firms, like collection agencies or local lenders or small to midsize service providers, are less likely to respond to the credit bureaus. It's a hassle they don't need. Banks, credit card companies, auto finance companies, and mortgage lenders are a lot more likely to respond.
So if you want -- and I'm not recommending this, I'm just saying it's a strategy some people decide to use -- you can dispute information in the hope the creditor will not respond. (This is the strategy many credit repair firms use to try to improve their clients' scores.) If the creditor doesn't respond, the entry gets removed.
Should you take this approach? That's up to you. (You could argue I shouldn't even mention it, but it is something many people do, so I felt it worth mentioning.
Maybe you tried and failed to remove a negative comment, a late payment, or an account that was marked "Paid as agreed" (which might mean the creditor agreed to let you pay less than you owed). Should you give up? Nope. Try asking nicely.
Creditors can instruct credit bureaus to remove entries from your credit report at any time. For example, I hadn't charged anything on a particular credit card for months and didn't notice that I had been charged my annual fee until the payment was late. (Like a doofus, I was just tossing the statements without opening them because I "knew" there were no charges.)
The late payment showed up on my credit report, so I called the credit card company, explained what had happened, that I had been a customer for years, and asked if they would remove the entry. They said sure. And they also agreed to waive all annual fees in the future. (Proving yet again that if you don't ask, you don't get.)
When all else fails, call and ask nicely. You'll be surprised by how often a polite request for help pays off.
Increase credit limits.
Another factor that weighs heavily on your credit score is your credit card utilization: The ratio of available credit to credit used makes a big difference. Generally speaking, carrying a balance of more than 50 percent of your available credit will negatively impact your score. Maxing out your cards will definitely hurt your score.
One way to improve your ratio is to pay down your balances, but another way is to increase your credit limit. If you owe $2,500 on a card with a $5,000 limit and you get the limit increased to $7,500, your ratio instantly improves.
To get credit limits increased, call and ask nicely. If you have a decent payment history, most credit card companies will be more than happy to increase your limit -- after all, they want you to carry a high balance. That's how they make money.
Just make sure you don't actually use the additional available credit, because then you'll be back in the same available credit ratio boat... and you'll be deeper in debt.
Open another credit card account.
Another way to increase your credit card utilization ratio is to open a new account. As long as you don't carry a balance on that card, your available credit immediately increases by that card's limit.
Try to get a card that doesn't charge an annual fee, though. Your best bet is through a bank where you already have an account. Granted, cards with no annual fee tend to charge higher interest rates, but if you never carry a balance, the interest rate is irrelevant.
But again, be smart: The goal isn't to get access to more cash, the goal is to improve your credit score. If you think you'll be tempted to run up a balance on a new account, don't open one.
Pay down outstanding balances.
I know. You need a higher credit score because you want to borrow money; if you had the money to pay down your balances, then you might not need to borrow.
Still: decreasing your percentage of available credit used can make a quick and significant impact on your credit score. So go on a bare-bones budget to free up cash to pay down your balance. Or sell something.
Paying down balances may be tough to pull off as a short-term move to increase your credit score, but it should be part of your long-term financial plan. Not only will your credit score increase over time, you won't pay as much interest -- which, if you think about it, is just giving lenders money you would rather stayed in your pocket.
Pay off high-interest, "new" credit accounts first.
Age of credit matters to your credit report. Interest rates matter to your bank account. If you have $100 a month to put toward paying down balances (over and above the required monthly payments, of course), focus on paying off high interest accounts. Then prioritize those by the age of the account. Pay off the newest ones first; that way you'll increase the average length of credit, which should help your score, but you'll also be able to more quickly avoid paying relatively high interest.
Then put the money not spent on that payment into the next account on your list. The "debt snowball" system really does work.
Ride some great credit coattails (of a person you trust.)
Say your spouse has a credit card with little or no balance and a great payment history; if he or she agrees to add you as an authorized user, from a credit score point of view you automatically benefit from her card's available credit as well as her payment history.
Keep in mind if he or she makes a late payment, that entry will appear as negative on your credit report too.
So choose your credit card friends wisely.
Keep your "old" credit cards.
Your age of credit history has a moderate but still meaningful impact on your credit score. Say you've had a certain credit card for 10 years; closing that account may decrease your overall average credit history and negatively impact your score, especially over the short term.
If you're hoping to increase your credit score but you also need to get rid of a credit card account, get rid of your "newest" card.
Pay every bill on time.
Even one late payment can hurt your score. Do everything you can, from this day on, to always pay your bills on time.
And if one month you aren't able to pay everything on time, be smart about which bills you pay late. Your mortgage lender or credit card provider will definitely report a late payment to the credit bureaus, but utilities and cell providers likely will not.
Check the "Accounts" section on your credit reports to see which accounts are listed, and if you have to pay late, choose an account that does not appear on your report.
Then work really hard to make sure you can always pay everything on time in the future. Your credit score will thank you, and so will your stress levels.
And, over time, so will your bank account.