Here Are Credit Scores Explained In A Simple Way

Credit scores explained to people are relatively easy to understand, as there is a simple algorithm which allows them to be calculated from the data which is given to the reference agencies by the lenders to whom you pay money. There are separate categories of information, each of which form a part of the overall credit score which is used to determine the likelihood of a loan being a good risk or a bad one. If you take the time to understand each component part and what it means, you can put in place a plan for improving your overall score.

The credit scoring system works by having lenders report back to recording agencies whenever payments are due to be made. Each time a payment is made on time it will increase the number and possibly the percentage of successful payments. Late payments will be recorded and will diminish the score, while a defaulted loan will have catastrophic consequences. Your repayments history makes up the largest part of the credit score, and is 35% of the overall total. Making payments on time is the first essential task in rebuilding a credit rating.

The other large sector in the credit score chart is the one which relates to your credit utilization. This simply means how much of the available credit you are actually using at any given time. Anyone who has credit cards with a large balance which they are not able to pay down each month is not likely to be a good risk for further credit. If, on the other hand, the balance is kept well under control at all times, it is likely that further borrowings will also be paid back on time. This part of the score can be manipulated by getting credit cards and waiting for the limits to be increased.

credit rating

Once you have credit scores explained to you it is easy to see how they can be improved over time. The one essential consideration is that you must have no serious blemishes on the file such as a court debt or even a bankruptcy. If you have been declared bankrupt, this will stay on the file for ten years and you will need to wait until after this before you can even begin to rebuild your rating. These serious blemishes will make it impossible for you to even get a high interest loan or credit card.

If you are able to qualify for a sub-prime high interest loan or card, it will be much better to take the credit card. The loan interest will need to be paid no matter when you pay back the loan, but the credit card interest only becomes due when borrowing occurs and the balance is not immediately paid. The right way to use one of these cards is by using it to pay for your day to day needs, saving the cash to pay off the balance in full at the end of each month.

When you have credit scores explained properly you will easily be able to see how this simple borrowing and paying back at zero interest can improve your rating over time. It will not be all that you have to do to improve your rating, but it will be the essential starting point. If you can maintain a healthy payment profile for a few months there is every chance that the card company will increase your limit, and this will send your credit utilization score higher. Take advantage of the free yearly monitoring that you are allowed, and you will see the improvement now that you have had credit scores explained.

 

 

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