Credit Score Components
The numerical summary of your credit report is referred to as credit score. It is a three digit number, which signifies your tendency of bill paying. The data from your credit report is used as a basis for calculating the value of your credit score.
The FICO score represents the most widely used one even though several variations can be found. FICO is an acronym for the Fair Isaac Corporation, the developers of the FICO score. It ranges between 300 and 850 and generally a number above 650 signifies that the person with this score has a very good credit history.
The exact formula for calculating the FICO score is not known because of its proprietary nature. However, it is known that there are five major components with different levels of importance used in the formula. They are as follows:
- 35% for payment history
- 30% for debt
- 15% for the length of credit history
- 10% for new credit inquiries
- 10% for the types of credit used
Payment History
A very high percentage is given to your payment history since creditors' and lenders' main concern is your tendency to pay your bills. Payment history is affected by any late payments, collections and bankruptcies that you have experienced. The more recent the delinquency is, the higher the effect on your credit score it will have.
Debt
The term credit utilization is used to refer to the amount of debt that you have as compared to the credit limits you are imposed. Your credit score will be higher, the lower your credit utilization is, meaning that you are farther away from your credit limits. It is recommended that the balances of your credit cards are around 30% or less of the limit you have.
Length of Credit History
The longer your credit history, the better, since it is logical to assume that if you have never been late on your payments for 10 years you will be more likely to be strict than one who has paid his/her bills on time only for a year.
New Credit Inquiries
Your credit report reflects all of your applications for credit. Keep the number of inquiries as low as possible. Otherwise, it can be interpreted as an indicator of deep debt or financial problems.
Types of Credit
The more types of accounts you have, the better, since it signifies that you are good at managing various types of credit.
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