A credit score is a part of an individual’s credit report, and is derived on the basis of several elements of the credit report itself. It is basically a number that indicates a person’s creditworthiness. The Fair Issac Corporation, which is popularly known as FICO, has developed some mathematical models that are used by companies, credit reporting agencies, and credit reporting bureaus. These mathematical models are made on the basis of fair credit reporting enactments, and have been passed by legislative bodies.
The five important elements that are considered while calculating any person’s credit score include:
- 35% of payment history
- 30% of amounts owed
- 15% is contributed by the length of the credit history
- 10% consists of New Credit that has been borrowed
- 10% of the rating is derived from types of credit that have been used
It must be noted that the acts that are used by the government to govern the calculation of credit score, include the Fair Credit Reporting Act, Equal Credit Opportunity Act, and Fair Credit Billing Act.
Credit Score Range
It is essential to know the range of credit scores. Ordinarily, the credit score for individuals range from 620 to 850. Your credit score will lie in this range, and will differ due to incidences such as over-borrowing, short sale, foreclosure, and bankruptcy. Apart from the negation of the credit score, points will be added on several different factors such as timely payment or total discharge of debts, that will cause the score to rise.
The importance of such a score lies in the fact that interest and payment of installments are decided upon the basis of this figure. Thus the better is the figure, the better the installments and interests will be.
What is a Perfect Credit Score
This is quite a common question that is asked by consumers and credit users. Well, there is no specific number. A perfect score, in theory, is 850, but it is not possible for every person to have such a score due to the fact that the debt-to-income ratio can never be perfect. Thus, from a consumer’s point of view, a perfect score can be anything above 800. If crossing the limit of 800 is a burden, then a score above 750 will fetch really good interest rates and installments.
How to Improve Credit Score
You might be wondering about the different methods that can be used to make your credit score perfect. There are some elementary steps that you can follow to improve your credit score. The three basic precautions that you can take are:
- Stop and cancel all possible credit cards that you think are not exactly useful.
- Pay all the bills as soon as they appear in the mail box.
- Refrain from borrowing any personal credit.
There are several other methods, such as credit dispute or corrections, that you can resort to in order to improve your credit score. One of the most important aspects of having a good credit score is that you do not have to worry about anything that relates to money.