Life is unpredictable and at any time your life you may need a loan to buy yourself a car or a home or you may need to buy insurance for yourself and your family. In every aspect the lender or the insurer will consider your credibility on the basis of your credit score. Even if you apply for a job, your employer will check your credit report to find out how reliable you are. So, to get yourself a job or to get a loan, you need to have a good credit score, otherwise, you have to pay a higher interest rate for the loan.

What a credit score is ?

A credit score is a three digit number which acts as a numerical manifestation of your creditworthiness. It determines your repaying capacity, once you get the loan. It is calculated based on the model of FICO (Fair Isaac Corporation) model. The score is on the basis of the information furnished by the credit bureau or a credit reference firm in your credit report.

The three main credit bureaus are Equifax, Experian and TransUnion. However, from February, 2009, Equifax does not calculate credit score any more. In order to avoid discrepancy in the mode of calculation, all the bureaus calculate the score in the Vantage way, which has a range of 501 to 990.

Factors that affect a credit score

The factors that affect your credit score are:

Total debt you owe: This factor comprises 30% of your credit score. It takes into account the types of credits you have with balances in each and how much you owe in each account. The numbers of your zero balance accounts are also calculated and it also sees how much you have used your revolving credit lines, to see whether or not you are over-extended.

Length of credit history: It gives information on the total length of time since you have opened the accounts and if you have a longer period of good history, your credit score becomes better.

Payment history: This constitutes 35% of the credit score. It is assumed and expected that the longer your credit history is, the better will be your credit score. It takes into account the number of delinquent and paid accounts. In case of delinquent accounts, it also sees how many payments you have missed and also the length of time you have been past due.

Details of your credit accounts: It comprises of information on the total number of account and their types, like, installment account, mortgage account, revolving account, etc. You can get a better credit score, if you have multiple numbers of accounts.

Importance of a good credit score :

It is very important to have a good credit score because, it will help you to:
Get a loan at a lower interest
Get employment opportunities
Get lower insurance premiums
Increase your credibility
Take a home on rent

A good credit report and a good credit score make the most important decisions of your financial life, so, it is necessary for you to improve and maintain your credit score. If you have an excellent score, you will be able to enjoy many financial benefits.