Your credit score affects many areas of your financial life, from being approve for a credit card to the interest rate you’ll pay on your mortgage. It is important to know the number and how it is calculate in order to be successful.
What is a credit score?
A credit score is a number that helps lenders such as banks, insurance companies, and renters assess how well you have handled your financial obligations. It’s one of many factors they may take into consideration when setting a fee-for-service fee, whether it’s giving you a loan or starting a business deal.
How is your credit score formed?
Your credit score is determined from the information in your credit report. There is no single formula for calculating your credit score, but these are the factors that FICO, the leading provider of credit scores, generally takes into account:
Payment history
Before lenders give you credit, they want to know if you pay your bills on time. Always make at least the minimum payment before the due date.
Amounts owed
High balances can hurt your score. Lenders prefer that you use less than 30% of your available credit. You can review the percentage you are using on your account page on your bank’s website.
Length of your credit history
Your score takes into account how long you’ve been using your credit accounts. Generally, the more time they have the better.
Types of credit
Having a variety of loan types, such as credit cards, auto or student loans, and mortgages, is good for your score. It shows lenders that you can handle multiple payments at the same time.
Credit inquiries
Lenders consider you to be a greater risk if you apply for, or open several new credit accounts in a short period of time.
The importance of each category may vary depending on your particular circumstances. If you’re just starting to build credit, the factors used to calculate your credit score may be different than someone with a longer credit history.
What do the numbers mean?
Credit scores typically range from 300 to 850 and can change monthly, for better or worse, based on what you do. The scores, for the majority of people (67 percent), are in the “good” range or higher.
Where can I get my credit score?
A growing number of banks, loan companies and credit card issuers, including Bank of America, offer free scores on statements or through online banking and mobile apps. If your bank doesn’t provide that service, you may have to pay to get it. You can purchase your FICO credit score at Myfico.com.
Under federal law, you are entitle to one free credit report each year from each of the three major credit reporting agencies (Equifax, Experian, and Transunion), but many people are surprise to find that credit scores are often not list, include in the report. Remember, credit reporting agencies don’t always collect the same information or evaluate it in the same way, so your credit score from each of these agencies may be different.
How does a credit scoring system work?
Credit scoring systems are complex and can vary for different types of businesses. Some systems may consider additional factors or weight factors differently. But in almost every way use to calculate your score, the following types of information from your credit report are consider:
- Have you paid your bills on time? Assuming your credit report shows that you’ve taken care of bills late, had any of your records put in assortments, or have sought financial protection, your score might be adversely impact.
- Might it be said that you are at the cutoff? There are a few scoring frameworks that think about how much your remarkable obligation in contrast shockingly restricts. Assuming the sum you owe is near your credit limit that is probably going to hurt your score.
- How long have you had credit? In general, scoring systems consider the age of your credit record. A short credit history can hurt your score. But this can be offset if you show that you make your payments on time and maintain low balances.
- Have you recently applied for new credit? Several scoring systems look at the “inquiries” on your credit report to see if you’ve recently applied for credit. If you’ve applied for too many new accounts recently, this could hurt your score. Not all inquiries are taken into account: For example, inquiries from credit grantors who monitor your account or who make “pre-screen” offers of credit will not be use against you.
How many and what type of credit accounts do you have?
Although having establish credit accounts is generally consider an advantage, having too many credit card accounts can hurt your score. Also, various scoring systems take into consideration the type of accounts you have. For example, for some scoring models, loans to consolidate your debt. But not loans to buy a house or a car, can hurt your credit score.
Credit scoring models compare this information to the credit behavior of other people with similar profiles and assign a score. These scoring models may use information other than data from your credit report. For example, when you apply for a home loan, the system may consider factors. Such as your down payment amount, your total debt, and your income, among other things.
