Some may be wondering what exactly is a “credit score”. A credit score is a number used to analyze your creditworthiness. It is sometimes referred to as your FICO score, a name derived from the Fair Isaac Corporation, a California based company that developed the credit scoring system. The scoring system involves taking a detailed look at your credit files. These credit files are gathered by credit bureaus and are made available to a potential lender once you have granted them your permission. The score is calculated by utilizing a formula which is highly dependant on the amount of existing debt, timely payments and length of history you have with existing lenders, just to name a few. It was designed to give potential lenders a quick look at any risk that would be involved in extending credit to a particular person.
Your credit score could range from the 300’s to roughly 900. The higher your credit score, the better. The average credit score is between 600 and 700.
With the majority of lenders, your credit score is a representation of your risk factor. And with many it’s just a matter of how much risk they are willing to take. Some lenders may weigh their decisions more on how you performed with loans that are similar to theirs while others may look at your entire credit history. For example, a mortgage lender may look at your overall credit history while the timeliness of your existing payments with other credit card lenders may be more important to potential credit card issuers.
Regardless of the type of loan you are or will be looking for it is imperative you keep a clean and timely credit file. That is be sure you aren’t in more debt than you can afford and are making all of your payments by the due date. Your credit score not only affects whether you will qualify for a loan, but it also affects the interest rates of the loan and the amount of the loan as well.
What’s Used To Determine My Credit Score?
Let’s take a more detailed look at how the credit scoring system calculates your credit score. There are five major factors that are used to determine how high or low your credit score will be. I’ve listed them in order from most to least impact.
1. Payment History- late payments will weaken your credit score drastically. Lenders normally look at your past history to determine how you will perform in the future. Therefore, if you were late with existing accounts they are going to assume that you are going to be late on any line of credit they may extend to you.
2. Credit Usage- if all of your cards are maxed out or over the limit, a red flag immediately shoots up to lenders.
3. Length of History- the credit scoring system automatically assumes that any person with an extended credit history is less risky than someone without any credit history.
4. Amount of times credit was requested-Continious requests for any type of credit during a short period of time is deemed risky and will subtract points from your credit score.
5. Types of existing credit-if you only have a secured credit card you are seen as riskier than someone who makes timely payments on their installment and/or revolving loans. (An installment loan is where a person borrows a certain amount of money and makes fixed payments until the loan is paid off i.e. a car loan and a revolving loan is where you make continuous payments and every time you make a payment it gives you more money to use i.e. a credit card.)
Next time we will go over how to make your score better!
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February 15th, 2009 at 7:42 pm
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February 16th, 2009 at 3:27 am
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