Often, many people don’t understand the meaning of credit score. Credit score refers to a specific number given to you after analysis of your specific information given concerning your credit report. A credit report is a document showing in brief all your history in regards to paying your financial obligations.
The credit score is used by lenders to determine your loan repayment potential based on your past performance record. The information provided by the credit report helps the lenders to ascertain your likelihood of you repaying your future debts.
In most cases, the credit score ranges from 300 lowest to 850 highest subject to the company calculating the score. Therefore, if your credit score is about 580, it shows that there is “580 people out of 850 that are likely to repay their debts”. If your credit score is 700, it indicates that “700 people out of 850 are likely to repay their debts”. The higher the odds, the higher the likelihood of loan repayment if the lender gives out loan.
Factors that determine credit score
Credit score rating changes frequently depending on the ways the borrower is spending the loans given earlier. Thus, the score is subject to a number of factors which includes;
- Payment history
Your loan repayment history is one of the main factors that determine your credit score. Lenders will use this factor to assess whether you have the capacity of repaying back the loan that you want to borrow. By tracing your repayment history they are able to an informed decision and rate you accordingly. Other important consideration given priority under this section are; your late payments records, bankruptcy, judgments, liens, and whether you have any debt in collections.
- The amount owed (30%)
The lender must as well determine the amount that you already owe others. It will help in determining whether you will have the ability to service the additional obligation that you want to seek based on your current budget. Lenders will also want to know your credit limits as it also have a direct impact on your loan repayment potential.
- The length of your credit history
The lender will want to determine how long you have been using credit. If you have used credit in the past, you will be required to provide details of how you used the loan and how you managed to repay. For someone who has stayed for a long time without taking the loan, it will become difficult for the lender to determine whether he/she can manage loan repayment responsibly.
If you have a good loan repayment track record, you will get a favorable credit score compared to newbie who is borrowing loan for the first time. Thus, to get a better credit report, it is advisable that you use credit on an ongoing basis.
- New Credit Applications (10%)
If you keep on applying for loans frequently, the lenders will have doubts with your repayment potential. Such practices indicate your financial struggle and it’s popularly known as “credit shopping”. Once you have been identified as a frequent borrower, your credit score is compromised. The more you keep on applying for new loans, the harder it becomes for you to service all your debt obligations.
- Types of credit used (10%)
Depending with the type of credit you want to borrow, the lender can determine your ability to use the money. If your history indicates that you have deferred interest or payment plans it means that you don’t have the ability to save up for purchases ahead of time. Consolidation loans on the other hand indicate that you have difficulty paying your debts in the past.
In Canada, credit score rating services are provided by Equifax and Trans Union upon request at a small fee. In order to improve your credit score, ensure that you have spent you r money wisely. You can achieve this by creating a realistic spending plan and a sound debt management strategy.