Your credit score is calculated using information compiled in your credit report. It’s a generic term used to describe the three-digit number assigned to you based on your credit history up until a particular moment. Your credit score alerts banks, employers, landlords, credit card companies, finance companies, mortgage lenders, and your potential spouse as to how you have managed credit and debt in the past.
Another way to look at it is that your credit score is so influential it determines your eligibility for credit cards, home and auto loans, student loans, apartment rentals, and even some jobs. When your credit score is high, it can be inferred that you have been diligent about managing the credit you’ve been awarded, making future borrowing less risky in the eyes of lending institutions.
On the other hand, if your credit score is low, it reveals that you have been unable to keep your word to repay credit that has been extended to you, making you a higher risk for the lender. Your financial history is maintained by independent credit bureaus that gather and track your credit information in order to sell it to those companies and institutions that need to get a heads-up on if they should trust you or not with respect to borrowing.
The three major credit bureaus, Equifax, Experian, and TransUnion, are in competition with one another, and the information they collect won’t be exactly the same, so it is important for you to know what your credit score is across the board.
How Do They Determine My FICO Score?
When you hear talks about credit scores, they’re usually referring to your Fair Isaac Corporation (FICO) Score, even though there are other scores like the FAKO score or VantageScore. The former is used to describe any credit score that is not a FICO Score. The latter is a brand of credit score that was launched by the three major credit bureaus in March 2006.
Since the FICO Score is arguably the most commonly known credit score, it is crucial to know what constitutes poor, good, and excellent credit scores through the eyes of the FICO gods. The logic follows that if you focus on bringing up your FICO Scores, the other FAKO scores will come up as well.
Below is information to help you see how your FICO Score is broken down. Your FICO Score considers both positive and negative information in your credit report. For example, late payments will lower your FICO Score, but establishing or reestablishing a good track record of making payments on time will raise your score. (For more specific information, visit: www.myfico.com)
Payment History: 35% of your score is determined by your ability to pay off your debt on time. Period. Even though a few late payments won’t completely tank your score, you want to make sure that your payment history shows that you’ve been able to consistently repay on time to cancel out some of those hiccups.
Amounts Owed: 30% of your FICO Score is determined by amounts owed. Having credit accounts and owing various amounts on them is not necessarily a bad thing. It doesn’t necessarily signal that you are a high-risk borrower. But when a high percentage of your available credit is already in use, it could show that you’re overextending yourself with respect to your spending, a sign that you may wind up paying late or not at all. In addition to the overall amount that you owe, FICO also looks at the amounts you owe on specific types of accounts: credit cards or installment loans.
Length of Credit History: 15% of your FICO Score is based on the length of your credit history. A general rule of thumb is that the longer you have an account open the more likely it will increase your FICO score. So even if you no longer use a particular line of credit, there is no need to officially close the account, especially if this account is among the oldest of accounts that you possess.
New Credit: 10% of your FICO Score is new credit. This category answers the
question “Are you taking on more debt?”
Types of Credit Used: Approximately 10% of your FICO Score is based on the types of credit used. Is there a healthy mix of credit? That’s the question that this category answers. Ideally, a healthy mix would include credit cards, retail accounts, installment loans, and mortgage accounts. If you don’t have all of these accounts, don’t go out there and apply for more credit than you need. This category is a small percentage of your overall FICO Score. If you’re looking to improve your credit score in a significant way, diversifying the types of credit that you use will not be the way to go.
What is a Good Credit Score
The FICO scale ranges from 300 and 850 as indicators of the credit scores.
760 – 849 Excellent
700 – 759 Great
660 – 699 Good
620 – 659 Fair
580 – 619 Poor
579 – below Very Poor
Excellent credit scores yield the best prospects of getting a loan with a lower interest rate. Even people with credit scores in a range of 700 to 759 may not have any difficulty getting loans at desired interest rates. Generally, any loan application with a credit score of 720 or above is treated in a similar fashion by the lenders.
Scores below 660 are considered risky and more than likely will have to bear higher interest rates, assuming the borrower receives the loan at all. In particular, folks with credit scores between 580 and 619 may find it difficult to get loans, and even if they do, the interest rates will be very high.
BMWK, do you know your credit score?