Credit Scores 101
What Is It? Can I Fix It?
Having bad, not having a bad. Learn what the numbers mean and how to drive them up.
So… Credit Scores?
Credit scores are nothing more than the numerical expression of an analysis based around a person’s credit history, and it’s intended to accurately represent the likelihood – or lack thereof – of them fulfilling their financial obligations.
Bad credit, then, is often used interchangeably to refer to a person’s bad credit history and/or low credit score.
In the U.S. the term most likely refers to a low FICO score, which is the model used by the vast majority of banks and credit grantors in the country.
How are FICO Scores Calculated?
FICO (Fair Isaac Corporation) is a data analytics company focused on credit scoring services, and came up with the process, algorithms, and software to calculate this score.
It’s based around consumer credit files from the three national credit bureaus: Equifax, Experian, and TransUnion. As mentioned before, as each credit file may contain different information at each bureau, it isn’t unusual for the scores to vary depending on which one provides the information to FICO to generate the score.
Furthermore, different companies – auto lenders, credit card companies, mortgage lenders – analyze their clients via various criteria, which means there are dozens of FICO score variations.
Fico scores range from 300 to 850, and can be roughly considered in this spread:
Each organization may have a different valuation depending on their credit in question, sometimes considering a score of 650 still within the “Good” parameter.
The exact formulas for calculating credit scores are understandably secret – and may vary depending on a number of factors – but FICO has disclosed a broad view of the most critical elements that come in play.
- Payment History: 35%
- Debt Burden: 30%
- Lenght of Credit
History: 15% - Types of Credits
Used: 10% - Recent Credit
Applications: 10%
How Do Scores Affect Interest
Rates and Monthly Payments?
Now that we know precisely what we are dealing with, it’s easier to understand how a bad credit score affects your finances. Another step on your journey to credit repair.
As you can imagine, having a poor credit score directly impacts many of the financial activities you might be interested in. Like getting financial instruments approved, such as credit cards, can be more difficult. Some insurance companies are known to take low credit scores into account when calculating insurance policy prices. And people with low credit score have trouble finding lenders willing to do business in spite of the higher risk (Something we can help you with CLICK HERE so we can match you with lenders that meet up to your credit profile needs).
But most often than not, a direct consequence of having a low credit score is that you start seeing higher interest rates and monthly payments from credit card companies and other financial institutions when you do get accepted for a loan.
These increased interest rates are a way for the lender to compensate themselves for the higher risk of loaning money to someone who represents a higher risk of failing to keep up with expected payments.
Step-By-Step Reference Guide
To Credit Repair:
However, we want to get you started on finding the solution to your credit problems right away, so we’ve put together a simple-to-follow reference checklist covering the broad steps you need to take care of to get your lousy credit repaired, and further information that will aid you to do so.
You’ll notice links along the checklist; these lead you to more detailed guides and further resources relevant to that particular step.
- Start Reducing The Amount of Debt You Currently Owe
- Start Fixing Your Payment History
- Improve Your Length of Credit Situation
- Start building Good References with New Credit
- Learn New Money and Credit Management Practices
Start getting the green light, follow these simple checklist, and we guarantee you’ll be getting greenlit for that loan you’ve been waiting for in no time!
How-To Guides
Need a better understanding of bad credit and how to fix it? Our finance experts have put together a series of step-by-step guides on a variety of bad credit related subjects.
