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What Goes into Your Credit Score?
Credit scores can be computed using different credit scoring systems but the most widely used system today is the FICO score. Its formula was created by the Fair Isaac Corporation and is the one used today by many lenders, banks, financial organizations and the major credit bureaus (Experian, Equifax, TransUnion.
The perfect FICO score is 850 and although achieving this number may seem unrealistic, getting a score ranging from 720 and above is already considered as good to excellent. However, a FICO score below 620 will put you in the category of a “high risk borrower”. Thus, it is recommended for everyone to be aware of the factors that make up their credit score.
Factors that Determine Your Credit Score Payment history. Your payment history comprises 35% of your total credit score. Here, how timely you are in submitting your payments, how long it takes you to pay your past due bills, how many times you were late or missed with your payments, and everything that has to do with your payment habits count.
Credit line usage. How you use your credit limit makes up the 30% of your credit score. The higher the usage of your credit limit, the lower your credit score is. Ideally, borrowers should not go beyond 30% of their available credit. If you own a low interest credit card, be careful not to maximize your credit line as this can damage your overall FICO score.
Length of credit history. 15% of your total FICO score is based on how long you have had credit. A longer record of credit history is of course more impressive especially if it shows timely payments all throughout. Be careful about closing your oldest accounts. Dont close your oldest credit cards just because they have high rates. The trick is to use them only for small purchases and pay off your balance in full always to avoid the interest rate.
New credit. Opening too many different accounts at once or in short period can pull down your credit score. Why is this? This gives a negative impression to lenders on why you need to apply for too many credit in that short span of time. Having too many inquiries made by the lenders whom you submit application to will also affect your credit score. If you are in the habit of sending credit card applications just to get the free shirt or the free cap upon signing up, stop now. Youre doing damage to your credit and thats not worth the freebie youre getting. Remember, new credit makes up 10% of your total credit score.
Types of credit used. The types of credit found in your credit report make up the other last 10% of your score. Having a variation of accounts in your credit report is definitely a good thing. For instance, aside from credit card accounts, having a mortgage, an auto loan and other credit in your account shows your capability in how you handle your obligations as a borrower.
What Does The Term Credit Score Mean To An Average Citizen
A credit score is a numerical expression based on a statistical analysis of a person’s credit files,a measure of credit risk calculated from a credit report using a standardized formula.Factors that can damage a credit score include late payments,absence of credit references, and unfavorable credit card use.Lenders may use a credit score to determine whether to provide a loan and what rate to charge.
Lenders,such as banks and credit card companies,use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt.Lenders use credit scores to determine who qualifies for a loan,at what interest rate,and what credit limits.The use of credit or identity scoring prior to authorizing access or granting credit is an implementation of a trusted system.
Credit scoring is not limited to banks.Other organizations, such as mobile phone companies,insurance companies, employers and government departments employ the same techniques.Credit scoring also has a lot of overlap with data mining,which uses many similar techniques.
In the United States of America, a credit score is a number based on a statistical analysis of a person’s credit files,that represents the creditworthiness of that person,which is the likelihood that the person will pay their bills.A credit score is primarily based on credit report information, typically from one of the three major credit bureaus,Experian,TransUnion and Equifax.
There are different methods of calculating credit scores. FICO is a credit score developed by Fair Isaac & Co.It is used by many mortgage lenders that use a risk-based system to determine the possibility that the borrower may default on financial obligations to the mortgage lender. The credit bureaus all have FICO alternatives:Equifax’s ScorePower,Experian’s PLUS score and TransUnion’s Credit score.
Americans are entitled to one free credit report within a 12-month period from each of the three agencies.The three credit bureaus run Annual credit report,where users can get their free credit report,normally without credit scores.Credit scores are available as an add-on feature of the report for a fee.
In some states such as California and Colorado a consumer is entitled to a free credit report within 30 days of being denied credit or receiving sub-normal credit terms from a lender due to their credit rating.