They need loans to sustain people’s lives and live at better living standards. Credit score is the basis of these loans. Because the first criterion that creditors look for in order to give credit to someone is credit score. A credit score is a financial indicator that shows how much credit risk you have for lenders and creditors. Therefore, it is very important credit score work. In order to make a credit score work, it is necessary to know the credit score well.
The credit score is not universal and there are some factors that cause the credit score to vary. The fact that the credit reports and credit scoring systems of the three main credit reporting institutions (Experian, Equifax and TransUnion) differ, is one of the reasons why the credit score varies. In order to conduct a credit score work, it is necessary to take into account the data of all three credit reporting institutions. The other reason is that there are different types of credit points. FICO is the type of credit score that creditors and creditors take most into account. If not as effective as FICO, VantageScore is another type of credit score that we often come across. In order to make a credit score work, you need to know which credit score type data you received when you received your credit score. Because the VantageScore credit score is usually higher than the FICO credit score, which may cause you to be misled.
What are the points that should be considered while conducting a credit score work?
In order to make a credit score work, it is necessary to know what the credit score consists of. Although the credit score varies according to three credit reporting institutions, the main content is the same. The FICO credit score includes;
- Payment history,
- Current debt,
- Length of credit history,
- New credit / hard credit inquiries,
- Types of credit.
This is the first element you need to know to make a credit score work. Because payment history makes up 35% of the credit score and this is the factor that affects the credit score the most.
In order to have a good credit score, it is very important to make payments on time. Delayed or incomplete payments will significantly reduce your credit score. The effect on credit score will increase further, especially after a month has passed. Because credit reports are issued monthly and credit scores are calculated through credit reports.
Problems with credit payments remain in the credit reports for 7 years. Persons with excellent credit scores are those who have made all payments in the last 7 years.
This is the second element you need to know to make a credit score work. Because this is the most effective factor that makes up the credit score after the loan payments. 30% of the credit score consists of current debts. These are also called loan utilization rates.
In order to work credit score, the ratio of the current debt to the total credit balance should be maximum 30%. Loan utilization rate for people with excellent credit score is less than 10% and they have not experienced any negative impacts on credit reports due to their current debts in the last 7 years.
Length of credit history;
This is the third element you need to know to make a credit score work. The effect of the first two factors on the credit score is 65%. The length of the credit history affects the credit score by 15%. The longer your credit or account history, the higher your credit score. Because creditors or creditors don’t know if you have the ability to finance this debt every time you acquire a new loan. The loans or accounts that have existed for years and where they track your payments give them more confidence.
New credit / hard credit inquiries;
This is the forth element you need to know to make a credit score work. The average age of your credits will decrease each time you open a new account. This will reduce your credit score. In addition, if you apply for a loan before you receive a new loan, if you encounter a hard credit query, your credit score will decrease again. These elements affect your credit score by 10%. Hard credit inquiries remain in the credit reports for 2 years, but each year the negative impact on your credit score will be less than 2 years, as some data from the previous year is not taken into account.
Types of credit;
This is the last element you need to know to make a credit score work. Lenders and creditors want creditors to finance their debts well. If you have multiple types of credit points, it means that you can manage different types of payment terms well. If you have one type of credit, it gives lenders and creditors the impression that you do not have the financial structure to pay other loans. The effect on credit score is 10%.