Fri. Apr 19th, 2024

The index represents how trustable the consumer is; learn more about it and how to improve it 

Finances are some of the main parts of anyone’s life, once the money is used to maintain our personal needs and achieve some of our dreams, like buying a house or traveling to a place we always wanted to know. 

Today, to meet all the financial needs of the population, in the short and long term, there are several features provided by banks and financial institutions, such as loans, credit, digital wallets, among others. Each of these services allows some benefits and, nowadays, it is almost impossible to live life without any financial solution.

For those who want to discover how to get a loan to buy a house or car, for example, it is fundamental to learn about the credit score. If you earn money and pay bills, this punctuation is part of your life, even if you have no idea of what it is. In this article, learn more about the credit score and why you should pay attention to this number.

What is it?

Basically, the credit score is an index used to classify consumers about their financial trustability. It goes from 300 to 850; the higher your number, the more trustable you look like to a financial institution, becoming a good potential borrower. The classification follows this standard:

  • from 800 to 850: excellent;
  • from 740 to 799: very good;
  • from 670 to 739: good;
  • from 580 to 669: fair; and, 
  • from 300 to 579: poor.

Based on data about your consumption and paying habits, a financial institution can check if you are a good payer and, therefore, decide if it is a good idea to offer you its financial solutions, like a credit card, loans, overdraft and others. 

This data is nothing less than your credit history and includes, for example, information like how many open accounts you have, how many and what are the level of your debt and how many of your past bills and loans you have paid on time.

How is the number calculated?

The calculation to get the score credit is based on five factors: the length of your credit history, your payment history, the total amount you owed, the types of credit you have already got and if you have new credit. 

The score credit comes 35% from the payment history, 30% from the total amount owed, 15% from the length of the credit, 10% from new credit and 10% from the type of credit that has been used.

How does it work?

Although the credit score may seem like only a number, it can influence financial life deeply. It is always used to analyze the consumer’s profile when he or she is requesting credit or any other financial solution in a bank.

A consumer with low credit scores, usually under 600, is considered an unreliable payer; therefore, lending and financial institutions can consider that offering credit for he or she is dangerous. This way, it is hard for them to get credit of any type, especially the biggest ones, such as mortgage loans.

Also, even if you get the credit in the financial institution with a low score credit, it can affect the borrowing conditions. Higher interest rates, shorter payment terms and requirement of a guarantor or co-signer are some of the scenarios that can be offered to consumers with low credit scores.

Ways to improve it

There are different ways to improve your credit number; some easier, some harder. The strategies vary depending on why credit is low.

People with short credit length need to wait some months and keep paying bills on time and those who pay the bills on time but always spend small amounts of money may have to ask for larger amounts (and pay them on time too).

Finally, consumers with debt must find a way to pay them off as soon as possible and people who always get the same type of debt (overdraft, for example) may have to ask for different types of credit, such as credit card, secured loan or real estate financing.

By admin

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