Understanding the basics of the credit scoring system and how your actual credit score rating comes about is important to everyone. When you are applying for a credit card, car loan, mortgage or a personal loan, lenders want to know what your credit risk level is.
Your credit score, which is referred to as the FICO score, is a three digit number between 300 and 850 that indicates if you are a good candidate for credit. A higher score indicates that you are a good risk and a lower score indicates that you are a bad risk. These three digits could stand between you and your financial dreams.
Here’s how your credit score is calculated:
- Your payment history accounts for 35% of your score. A good payment history over a long period of time is what counts.
- Your debt to credit ratio accounts for 30% of your score. This is based on what you owe on each account as well as the combined total of all accounts.
- The length of your credit history accounts for 15% of your score. This is the reason you should start building credit as early as possible, even after bankruptcy.
- A mixture of accounts makes up 10%. A “healthy mix” of different types of credit is what they are looking for. Riskier types of credit such as credit cards often score lower than mortgages, car and school loans.
- The number of different accounts you have make up 10%. If you have too few credit accounts it can hurt your score just as having too many can. If you apply for new credit frequently, it can also hurt your FICO score.
There are three primary credit bureau companies – Equifax, Experian and TransUnion. You can request one free credit report from each of these credit bureaus every 12 months through annualcreditreport.com.
A good credit score is important to your financial well-being. Make sure you know and understand your score.
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