How your credit score is determined?

credit score

Your credit determines your history of paying bills, your financial situation, and whether or not you would be able to pay back the loan you get. Based on some criteria, your credit could be good or bad. 

If you have failed to pay your bills on time in the past, you would also not be able to do so in the future and this would give you bad credit. And if you have paid your bills on time and your financial situation is stable then you have good credit.

Good and bad credit is usually labeled on the basis of credit score. One of the most common and famous score to measure credit history is the FICO (Fair Isaac Corporation) score. This score ranges from 300 to 850. with 300 being the lowest and 850 being an exceptional score. The score from 300 to 579 is considered a bad credit score and it is important to know because usually, it is almost impossible to get a loan or a credit card with this credit score.

This score is calculated by checking the credit file of the borrower’s credit history which would give information regarding if they owe anyone any money or if they pay their bills on time or not.

Composition of a FICO score:

  A FICO score is made up of five components that are as follows:

  • 35% of the score, the highest part is based on the history of paying bills on time or not.
  • 30% of the score is made up of the total amount of money the person owes anyone. It includes their remaining bills and debts and their credit utilization ratio which is the comparison between how much money is remaining for them to borrow further and how much they owe anyone at any given time. If this ratio is high, it could result in a bad credit score.
  • 15% consists of the duration of their credit history.
  • 10% consists of a mix of different credit types.
  • The last 10% includes the latest taken loan or the one recently applied for.

So, it is important to maintain a good credit history so that your credit score is good and you would be able to get a loan easily. But it is not that you can never get a loan with bad credit. You should not lose hope if your credit score is not good. You can always go online and search for a website for bad credit loans. There are online lenders who would lend you money even with a bad credit history. Innovative finance can also help you in this manner and get you a reliable lender even with a poor score.

There are also ways by which you can improve your credit score. You should set a practical goal for paying back and slowly works towards it. Whenever possible, repay above the minimum due. Try to pay back the loan with the highest interest as quickly as possible and before the others.