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Credit score needs no introduction for any adult who has started spinning his financial wheel for his day to day needs. Whether you apply for a credit card or reach out for a loan to purchase your dream car or home, credit score is the judge that decides if your dreams can turn realistic or not. It is something sans which your life just cannot move on despite the fact whether you have money or not.
The way your money gets floated in the market matters when it comes to maintaining the perfect credit score. Turning in cash for anything that you buy without having to depend on banks simply does not imply that you have a very good credit score. On the contrary, having as many loans as possible is not a plus that will boost your credit score. To exactly comprehend the intricacies involved in calculating this magic number, one needs to delve into the details of the credit score models.
Credit score models:
Following are the three popular credit score models and the minutiae about each of them.
FICO credit score: FICO is the acronym for Fair Issac Corporation’s credit scoring model. The exact algorithm for calculating the FICO score is a secret of this giant, albeit, these are the primary factors that govern the score.
35% – Payment history
30% – Credit usage
15% – Duration of credit
10% – Different types of credits owned
10% – Recent inquiries for credit
As seen above, this score reads all angles of a person’s finances and judges the ultimate number for banks and other financial institutions that use this score in their decision making process of how likely a person is to pay off the debt granted. The score can range between 300 and 850; where you stand on this scale determines your credit worthiness.
NextGen credit score: This is the latest credit score model developed by none other than the Fair Issac corporation. NextGen was designed to focus more on people with “poor” credit histories. A more apt way of putting this is that NextGen concentrates on subprime lending. These are the loans offered to people who do not have a good traditional credit score. The interest rates on these subprime loans are higher when compared to their prime counterparts. This model protects people with a bad credit score by providing a second chance to evaluate the chances of risk involved. If they have established a certain level of trustworthiness in their past despite certain negative aspects; it allows them to have a better score and thereby avail the opportunity for a better interest rate.
Vantage credit score: This is the model engineered by the credit bureau kings – Equifax, TransUnion and Experian. Although the nitty-gritty of this model has still been maintained as a secret, it differs from the traditional FICO model in rating the credit scores between 501 and 990. It also assigns a grade of “A” for the best and “F” for the worst.