Consumer Credit Score – Improve It And Rock On

Consumer Credit Report Basicas

Last Updated on October 6, 2020 by Nexus Financial

Consumer Credit Score Overview

Your consumer credit score is extremely important because it affects your ability to borrow money as well as the cost of doing so.  Simply put, those with a higher consumer credit score generally receive more favorable credit terms.

This will translate into lower payments and less paid interest over the life of any of your credit accounts.   Also your consumer credit score plays a role in the car insurance premiums that you pay.  Finally, it can even determine whether you get hired for a particular job or place to live.

Consumer Credit Report Basicas

DISCLOSURE: Nexus Financial Services is a provider of small business working capital and consumer financing services.

What Is Your Consumer Credit Score?

Your consumer credit score is your credit history expressed as a three-digit number.   Accordingly, it tells a lender your potential credit risk since it predicts the likelihood you will pay your bills on time.

Think of your consumer credit score as a grade for how financially responsible you have been over the years.  For example, how you have managed loans, lines of credit (credit cards) and other financial obligations.
A consumer credit score is extremely important because it affects your ability to borrow money as well as the cost of doing so.   So, those with higher credit scores generally get better credit terms.

1 – Consumer Credit Score Contents

Your consumer credit score is a statistical summary of the information contained in your consumer credit reports.   Generally it is graded on a scale ranging from 300 (bad) to 850 (excellent).

It is used by lenders, landlords, employers and others to determine your level of credit risk, responsibility, and overall character.   In short,  your consumer credit score represents your financial reputation.

Credit scores are calculated using information found in your credit reports.  For example  your payment history, the amount of debt you have, and the length of your credit history.

A higher consumer credit score means you have demonstrated responsible credit behavior in the past.  Consequently this makes potential lenders and creditors more confident when evaluating a request for credit, like a loan or a credit card.

Credit Score Ranges

  • 800-850:  Excellent
  • 740-799:  Very Good
  • 670-739:  Good
  • 580-669:  Fair
  • 300-579:  Poor

Scoring Model Affects Scores

Consumer credit scores vary according to the scoring model used and which credit bureau furnishes the data used for calculations.  Because not all creditors report your data to all three credit bureaus (Equifax, Experian and TransUnion).   For example, a creditor may report to only two, one or none at all.   Also, lenders may also use a blended credit score from the three major credit bureaus.

Credit Scores Vary By Industry

The types of credit scores used by lenders and creditors may vary based on their industry.   Consequently an auto lender might use a credit score that places more emphasis on your payment history when it comes to auto loans.

Since everyone’s financial and credit situation is different, lenders may also have different criteria when it comes to granting credit.  For example, a lender my include your income as a factor in approving a loan application.

2 – What Affects A Consumer Credit Score?

Your consumer credit scores are based on the information found in your credit reports. In short they represent a numerical weighting of the different categories found in a credit report.

There are two major providers of consumer credit score reports in the US: FICO Score and VantageScore.  While the credit scores may be calculated a bit differently, they will likely produce very similar results for you.

Your credit score is calculated only from the information in your credit report. However lenders may look at many other things when making a credit decision.  Accordingly, a lender will review your income, how long you have worked at your present job, and the kind of credit you are requesting.



3 – Consumer Credit Score Categories

If you have good marks in each consumer credit score category, your score should be good regardless which vendor report is used.   Specifically, using FICO Score as reference, these percentages are based on the importance for the general population. Additionally, the importance of these categories may vary from one person to another.

Payment History (Weight 35%)

Payment history is the most important part of any credit score.  Basically the first thing any lender wants to know is whether you have paid past credit accounts on time. Consequently this helps a lender figure out the amount of risk it will take on when extending credit.

Amounts Owed (Weight 30%)

Having credit accounts and owing money on them is the second most important category of a credit score.  Because it is an indicator of whether your spending habits are sustainable and if you are likely to face serious financial problems in the future.

If you are using a lot of your available credit, this may indicate that you are overextended-and banks can interpret this to mean that you are a higher risk of defaulting.

Length Of Credit History (Weight 15%)

A longer credit history will increase the quality of predictive data in your consumer credit report.  Correspondingly, the length of time using loans, credit cards and lines of credit is important in accurately forecasting a borrower’s future risk behavior. However, even people who haven’t been using credit long may have credit scores depending on how the rest of their credit report looks.

Credit Mix (Weight 10%)

This category measures your mix of different types of credit accounts (credit cards, retail accounts, installment accounts, auto and mortgage loans) and how recently you have used them.  Because the types of credit you have used shows how experienced a borrower you are.   Also it is not necessary to have one of each.

New Credit (Weight 10%)

On a consumer credit score, this category emphasizes your recent financial performance.  Basically this is one of the best predictors of your future financial activities.

Research shows that opening several credit accounts in a short period of time represents a greater risk to a lender.  Specifically this applies to people who do not have a long credit history. So, if you can avoid it, try not to open too many accounts too rapidly.

4 – Tips To Improve Your Consumer Credit Score

The process to improve your consumer credit score is a combination of factors.  First, fix your credit reports of errors (if needed) by disputing negative items.  Second change your financial behavior to better manage your credit and debt accounts.

This process takes patience, discipline and time.   Therefore here are specific areas that you should focus on:

  • Improve your credit accounts payment history.
  • Reduce the amount of debt that you owe.
  • Minimize opening of new credit accounts.

 

Consumer Credit Score Basics - Conclusion

Conclusion – Consumer Credit Score

Improving your consumer credit score is like losing weight.  Basically if your score is good to excellent, you simply focus on maintaining your positive financial behavior. Otherwise, you will need to make changes in your financial life.  Overall it is really that simple.

Similar to a crash weight diet, quick fix efforts to improve your credit score will likely not produce the results that you desire.  Rather it simply takes time to manage credit responsibly.

If you haven’t used credit well in the past, you should review your credit reports.  Particularly you need to determine whether you need to repair your credit history before you see credit score improvements.

The quality of the data the credit bureaus collect is used to calculate your credit score. So, good credit data in, good credit score out, with time.

An overview of a consumer credit score is presented. This includes 1) Importance Of Your Credit Score; 2) What Is A Credit Score; 3) Details About A Credit Score; 4) What Affects A Credit Score; and 5) What You Can Do To Improve Your Credit Score.
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