Credit Score

Credit scores (also known as FICO scores) can seem intimidating, especially when you consider how they can impact your ability to buy a house, buy a car, or even get a credit card. But by understanding where your credit score comes from, you can get a better understanding of how to build and protect your current financial reputation.

So what is a credit score, exactly?

Credit ratings factor into many of your daily financial transactions. For major purchases and more long-term payment plans, your credit is a big part of determining your interest rates and acceptance into certain programs.

Your credit rating is the lending industry’s way of figuring out how likely you are to pay your bills on time. It takes into account your bill paying history, the amount of open credit accounts you have and other factors. It is shown through your credit score which number that typically ranges from 300 to 850. A strong credit rating is shown by a high credit score and tells lenders that you are financially strong and capable of paying off your debts on time. A low credit rating is shown by a low credit score and tells lenders that you may have a tough time paying your bills on time. Lenders use this and other information to calculate your personal interest rates, credit limits and even whether or not you can be accepted into their programs. In other words, the higher your credit score, the more financial freedom you are given and the more likely you are to receive high credit limits with low interest rates.

How Lenders Calculate Your Credit Score

Credit agencies consider many different factors when calculating your individual credit score. We’ve provided an approximate breakdown of what goes into their decision below:

• Payment history (35%)
  Your track record of paying off credit cards, mortgages, retail store cards, etc. plays a large part in your credit rating. Your recent payment history makes the biggest impact. That’s why it’s best to pay your current bills on time if you want to raise your credit score.
• Outstanding debt (30%)
  The amount of money you currently owe to creditors is another large factor in calculating your credit score. Higher credit ratings are typically given to those who have high credit limits, but who chose to use relatively little of it. Consumers who use about 25% of their available credit are the most attractive to lenders.
• Length of credit history (15%)
  Simply put, the longer you maintain good credit, the better.
• New credit (10%)
  Each time you apply for a loan or a new credit card, lenders check your credit score. While your credit score is NOT affected when you check it, it does drop a little when creditors check it. If you apply for a lot of credit cards or loans at one time, your credit score could drop. Creditors may view taking on this much debt as a signal that you could be having a tough time financially.
• Type of credit (10%)
  Credit agencies will also look at the mix of credit sources, including mortgages, credit cards, finance company accounts and others. For this to impact your credit score positively, you should have a good mix of credit types and not show an over-reliance on credit cards.

While your credit score is a major factor in applying for loans, credit cards and other sources of credit, it’s not the only factor. Your income, employment status, and years at your current address may also be taken into consideration.