What is a Credit Score?
One of the most important aspects of your financial life is your credit score. Your credit score take all of the information in your credit report and reduces it down to a number. Depending on the credit reporting agency, this number may fall anywhere between 350 and 950. The higher your credit score, the better. For example, anything below 620 is considered poor, while 650 to about 720 is considered fair, and anything above 770 is thought to be excellent. But you can see that there is a lot of room for scaling and borderline decision-making.
How your credit score is determined
There are many different methods for determining you credit score. Different agencies and credit bureaus have different ways of deciding what your credit score is. One of the most popular measures of credit score is from the Fair Isaac Company. The score that you receive from this company is known as your FICO score. Most mortgage lenders and many others use your FICO score to determine your level of creditworthiness.
No matter the method of scoring used, or the system a company uses, there are a few items that are taken into consideration in terms of your credit score. Here are some of the main factors that determine your credit score:
Payment history. One of the most important considerations in determining your credit score is your payment history. This is a record in your personal credit report of all of the payments you make on your credit and loan accounts. This includes your required minimum payment, whether you make your payment on time, and if any payments have been missed altogether. Payment history is considered important to your score because it is considered a major indicator of whether you will make payments on time and in full in the future.
Available credit. This is a measure of how much total credit you have available as compared to the amount of debt you have. For example, if you have three credit cards with total available balances adding up to $6,000, and you have $4,000 in debt on these cards, then your ratio is 4/6, or 2/3. This means that 2/3 of your available credit is being used up. If you only have $2,000 in debt, then your ratio would be 1/3. The less of your available credit you are using, the higher your credit score.
Length of credit history. How long you have had credit matters. If you got your first credit card 18 and you are now 30, that looks more favorable than if you first got a loan at age 25. The longer your history of making payments on loans and other types of credit, the better your credit score will be.
Types of credit that you have. When it comes to your credit score, all loans are not created equal. Some are considered better than others. An auto loan is considered more respectable than financing at a department store. Likewise, a department store credit card is not viewed as favorably as a credit card issued by a major company or bank. The worst kinds of loans are things like payday and title loans. These loans can have a negative impact on your credit score – even if you pay them on time.
Number of inquiries into your credit. The number of times that your credit report is accessed can also affect your credit score. If you apply for more than one or two credit cards in a two month period, or if you apply for several different types of loans, credit score calculations will penalize you for trying to get a lot of credit in a short amount of time.
Other factors that can affect your credit score. Other items that can affect your credit score include such things as tax liens, bankruptcies, income reports and financial judgments made against you. Additionally, utility companies and others that expect payments from you can report you to credit bureaus if you do not make payments. This can negatively impact your credit score.
It is important to keep track of your credit score, and work to behave in a responsible manner with regard to your loan payments and your bills. This way, your credit score will be more likely to be positive.
Related Article: Credit Monitoring >>