Credit Scores Unveiled: Navigating the What, Why, and How of Your Financial Passport.

Your credit score is your financial passport, without which you can not get any credit financing, loan, or mortgage. This is a fact of life, without any doubt or debate. Your credit score signifies your financial health to lenders. So, we must understand this economic term and devise a way to maintain a good credit score.

What is a Credit Score?

A credit score is a numerical expression based on a level analysis of a person’s credit files, representing the creditworthiness of an individual. The most common credit score model in the U.S. is the FICO score, which ranges from 300 to 850. Three private, for-profit companies in the United States collect and maintain individuals’ credit information and compute credit scores. These three major credit bureaus are :

1. Equifax,
2. Experian, and
3. TransUnion.

How do they compute credit scores?

These credit bureau companies regularly collect information about your financial transactions from lenders like banks, credit card companies, and mortgage companies. This data includes the amount of credit you have, your payment history, the length of your credit history, types of credit used, and any new credit you availed.

Two Credit Scores Compute Models

There are two models to calculate a credit score- FICO and VantageScore. FICO, developed by the Fair Isaac Corporation, is the most common method to calculate a person’s credit score.

The VantageScore model is a collaborative effort by the three credit bureaus: Equifax, Experian and TransUnion.VantageScore 4.0 is the latest version of the credit scoring model. Its website claims to compute the credit scores of 33 million U.S. adults.

Are There Legal Basis of Credit Scores in USA ?

The operation of credit bureaus in the United States is primarily governed by the Fair Credit Reporting Act (FCRA), enacted in 1970. The FCRA sets the standards for collecting, disseminating, and using consumer credit information.Therefore, the computation of credit scores including collecting,sharing consumer information are based on law and regulation and consumers have even a grievance redresssal mechanism by FERA.

5 Good Reasons for a High Credit Score!

Having a good credit score is essential for several reasons, as it significantly impacts your financial opportunities and the cost of borrowing.

1. The most apparent benefit is quick approval of credit cards and loan applications, as lenders will feel a lower risk of lending money to you. They may sweeten the deal with lower interest rates and more favorable terms on loans and credit lines, such as higher borrowing limits.
2. These days, Landlords often check credit scores as part of the tenant screening process. A good credit score can make renting a house or apartment easier.
3. Utility companies may waive security deposits if your credit score is high, as it indicates a lower risk of late or missed payments.
4. Some employers check credit scores during hiring, especially for positions involving financial responsibility or security clearances.
5. In many states, insurers use credit-based insurance scores to determine auto and homeowners insurance premiums. A better score can lead to lower premiums.

What are Benchmark Credit Scores for Lending?

There is no universal benchmark credit score for lending, as requirements can vary significantly between lenders and types of financial products. However, credit scores are generally categorized as follows:

• Excellent Credit: 800 and above
• Very Good Credit: 740 to 799
• Good Credit: 670 to 739
• Fair Credit: 580 to 669
• Poor Credit: Below 580

What are some Credit Check Platforms?

Here is a list of seven credit check platforms . Some gives free reports and some charge fees depending upon plans you subscribe.

1. annualcreditreport.com provides 1 free report per year from each bureau
2. Equifax.com | 6 free reports per year
3. Eperian.com | 1 free report per year . They have premium services as well.
4. Transunion.com 1 free report per year | Free basic, premium services vary |
5. Credit Karma () | Unlimited (TransUnion and Equifax
6. myFICO () | No free report. Prices varies depending on the plan.

Remember that when accessing your credit report, it’s important to use reputable sources to protect your personal information.

7 Sure Shot Ways to Improve Credit Scores?

Improving your credit score requires strategies and behaviour to build long-term, sound financial habits. Here are eight steps :

1. You are entitled to a free credit report once a year from each of the three major credit bureaus — Equifax, Experian, and TransUnion.Use it and inculcate a habit of regularly checking your credit score.
2. Paying your bills on time is a no-brainer step to improve or stop your credit score from going down. Payment history is a significant factor in credit scoring. Therefore, always pay your bills on time and avoid late payments, especially those over 30 days late, which can significantly damage your credit scores.
3. You keep credit utilization low, usually below 30% of your total. This low credit utilization hints to creditors about your less dependence on debts. High credit utilization can be a red flag to creditors and can lower your score.
4. Use Buy Now Pay Later (BNPL) schemes. The credit card interest rates are very high. Therefore, interest-free BNPL instalments are usually much cheaper than paying off a credit card bill and also help consumers maintain lower credit card balances.
5. Keep old accounts open so that you build a longer credit history.
6. A mix of credit types (credit cards, mortgages, auto loans, etc.) can positively impact your score. However, don’t open new accounts for a better mix; it should happen organically.
7. Too many hard credit inquiries in a short time can negatively impact your score. Be cautious when applying for new credit.