These days, people are often complaining about how hard it is to obtain credit and how even the credit score that had once been “very good” had been demoted to simply “good”. What must be done to have a good score to get a good deal on a loan?
What is It?
A credit score is simply a score, a number that represents the level of creditworthiness of a person – the higher the score, the better. Although there are many different types of tools used to gauge this score, the FICO system is the one most commonly used. FICO is comprised of the following:
- how timely the credit is paid (35%),
- how much credit is owed in comparison with the credit limit (30%),
- the length (i.e., number of years) of the credit history (15%),
- recent credit (10%), and
- various credit types availed of (10%).
Getting a High Score
Because the final approval of the loan will depend on the borrower’s credit score, getting a high score is ideal – something around 700 to 850. Looking back into the FICO system, it is easy to see that the timeliness of payment is the most important item. According to the guidelines, delinquency could only be reported by the lender when the credit is 30 days past due; still, to ensure that this factor is maximized, the borrower should always pay on time.
The second significant factor is the amount owed versus the credit limit. Most finance experts advice borrowers to keep the credit below 20% of the limit. Still, this percentage can be affected when a credit card is cancelled or if the company or the bank lowers the credit limit. To keep the risk at a minimum, borrowers should always check their limits and stay below 20% – if going beyond the limit is really unavoidable, applying for another credit card can actually add to the overall limit.
The last 3 factors may not be as significant as the two but when these are combined, they still total at 35%. It is important to understand that the longer the good credit history is, the higher the score. Therefore, it is best to keep old credit issuers active.
Still, it all boils down to how far is one willing to go to obtain a high credit score – is it worth applying for a new car loan plus housing loan just to boost the 10% portion of the “various credit” or the “new credit” factor? Maybe not.
Writer: JAdalia