Brainy Loans
Unpacking Credit History: Understanding Your Financial Past.
Credit history will be considered like your personal report that shows what you have borrowed and how did you return the money. Usually, your credit history report will have a detailed past of your credit activities such as bill payments, credit card usage, credit utilization, and how much debt you currently have.
This type of report is looked over by lenders to help them determine if you have a positive history of repayment. If you have a positive credit history lenders will look at you as a positive candidate for their credit offers to help you receive more favorable terms in return.
But on the other hand, if your credit history is short or bad lenders might deny you a loan because they might not be able to trust you to repay them. Credit history is determined by making payments on time for a long time, this shows lenders that you’re responsible to keep your promises.
It is recommended before applying for an expensive loan to have a positive and lengthy credit history helping you increase the chances of approvals and receive the best terms.
What is a Credit report?
A credit report is like documentation of an individual’s life on paper. Credit reports will have individuals personal identifying details, credit accounts, payment histories, and all public records.
This report will show everything from credit accounts to any public records such as bankruptcies. You can view your credit report once a year by requesting it from the credit bureau once a year.
Credit reports are used by lenders to help them understand borrowers’ situations to determine if they are able to give them a loan. To understand your full borrower pictures it is good to view your credit report and see if they are any information you can update or if there were incorrect information issues.
This will help you boost your credit history and in return increase your loan options.
What is a credit score?
The credit score will be a 3-digit number that represents individual creditworthiness. These number is based on factors such as payment history, credit utilization, length of credit, type of credit, and any recent inquiries.
This number ranges anywhere from 300-850 and will determine how likely you are to repay your loans. The lower the credit score the more risk you present to the lenders meaning that there have been late payments or failure to pay on your credit accounts.
This is how credit scores are categorized:
Poor Credit (580 and under): Individuals with that credit score are generally considered high risk by lenders and may be limited by the number of lenders who will approve you. Usually, you will be presented with high-interest rates and fees. Have a higher chance of denials by lenders.
Fair Credit (580-669): Will be still considered high risk for lenders meaning they will receive higher interest rates and fees.
Good Credit Score(669-740): Will be considered as a medium risk for lenders meaning that lenders will still have no issues working with the individuals. Usually have a lower rate of denials and more approvals. But still might receive not the most favorable rates.
Very Good Credit Score (740-799): These are low-risk borrowers and will receive good rates with really high approval chances.
Excellent Credit Score (800-850): The top borrowers will receive the best rates and have the lowest chances of getting denied by lenders. Usually, borrowers have a proven repayment record for years.
What are the credit score models?
There are a handful of credit score models used by credit bureaus to determine your creditworthiness. Each lender or creditor might use its own combination of credit score models to make an approval decision.
The most common models used to score your credit history are the FICO score model or the VantageScore model. The most popular or widely used model out of both of them is the FICO score, but every lender has its own evaluation procedures.
FICO Score Model: Is a mathematical formula that uses factors such as credit inquiries, types of credit, credit history, credit utilization, and payment history. This was developed by Fair Isacc Corporation and is an automatic formula that will take all those factors into consideration and will give you a score from 300-850.
Vantage Score Model: This is a credit score model that is the second most used by creditors to evaluate your credit account. This model was developed by reporting agencies Equifax, Experian, and TransUnion. Once again this model will use the same scoring criteria with 300 being on the lower side and 850 on the highest.
Usually, the higher the credit score the less risk you present lenders when they evaluate your credit account. The Vantage Score model uses the same algorithm as the FICO score with a slightly different rating to determine your credit score.
How is your credit score determined?
A credit score is determined by a mathematical formula that predicts how likely a borrower is to repay a loan. This algorithm helps lenders eliminate the risk of lending money to someone who may not pay them back.
The exact formula that credit bureaus use is not disclosed, but there are main factors that are highly considered when determining your FICO score, such as:
Payment History: This is usually 35% of your overall credit score and is determined by how you repay your loans or if you pay your bills on time.
Loan Amounts: Usually will be 30% of your credit score and this is evaluated by the amount you borrow compared to your credit limits. So if your credit limit is $10,000 and you borrowed $9,000 this will ding your credit because you’re carrying more debt than creditors think you should.
Credit Length: A simple thing but will count as 15% of your credit score. This is determined by the length of your credit accounts. For example, if you have been making timely payments for the past 10 years is a better sign than making timely payments for 3 months.
A mixture of your credit: This will count at 10% of your credit accounts and is determined by your current credit accounts. Lenders like to see if you have different credit accounts such as auto loans, credit cards, and such. This determines that you are responsible for multiple credit accounts.
New Credit Accounts: Similar to the credit mixtures this will count at 10% of your overall credit score. This is determined by the amount of recent credit accounts you have. For example, if in the last month, you tried to apply for 10 new credit cards this will raise a red flag because it can mean you lost your job and you need quick funds to cover bills. Although this might not be the case creditors usually proceed with caution when they see this.
Who are the Credit Bureaus?
Credit bureaus are reporting agencies that collect borrowers’ information and store it for lenders to use. The credit bureaus make money by selling credit reports to lenders, and they provide a free storage service for borrowers.
The main reporting agencies are Equifax, Experian, and TransUnion. These agencies collect and store millions of pieces of information about individuals and businesses. They then use a formula that determines a borrower’s creditworthiness by taking their personal credit history into account.
Tips for establishing a strong credit history.
Having a good credit history can be really beneficial for an individual’s future. It’s not an easy process, but it can play a big role in providing a more comfortable life. A good credit history can lead to easier approvals from creditors and favorable rates, making it easier to acquire products such as cars and houses that are financed.
To establish a strong credit history, you should pay your bills on time, use less credit than you’re approved for, keep your old credit accounts open, and have a long payment history.
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