Knowing what a Credit Score is and what it’s actually made of is very important, especially if you are trying to establish credit or perhaps are trying to improve your credit rating.
The credit score is a three-digit number generated using information in your credit report which is used to determine among other things what interest rates you will be charged when given credit, or whether or not you will be given the credit to begin with. A good credit score is the key to your qualifying for a good rental apartment or for paying a deposit before connecting your utilities. The credit score enables one to predict the risk involved in giving you credit, especially within the first 24 months of your scoring.
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The most commonly used credit rating system is the FICO credit score. According to MyFICO.com, FICO scores aid in the decision making processes of up to 90% of financial institutions in the United States. With ratings ranging between 300 and 850, the higher one scores, the lower the risk.
Until recently, consumers had three FICO scores, generated from the three major credit bureaus (Experian, TransUnion and Equifax). Currently, we are able to access FICO scores from the last two companies previously mentioned as of 2009.
What goes into a credit score?
There are five major categories involved in formulating your credit score, all emanating from your credit report. Your payment history and the amount of debt you owe are big determinants of how well your credit rating will be scored. The five categories are highlighted below:
- Your payment history: This makes up to 35% of your credit score. Your account payment history is considered to determine how likely you are to pay or default if given credit.
- Existing debt: This makes up to 30% of your credit score and examines the amount of money you currently owe, and the total amount of credit available to you.
- Credit history: Makes up 15% of your credit score and looks into how long you have been involved in running your accounts and how active your transactions are. The longer you have had access to credit, the better placed you are to receive a good credit score.
- Credit types utilized: At 10% of your credit rating, the types of credit facilities you have utilized in the past or are currently utilizing will be used to determine how well you are managing your finances.
- New credit: Also at 10%, your current track record on finding new credit will be considered. Making credit inquiries and opening new accounts is used to determine this score.
It is important to note that other personal information such as age, income, employment, race, address or marital status do not affect your credit score. Within the scoring model, there are several different formulas that can be applied to determine your credit score depending on your credit profile.
These profiles may range from clients with young credit histories to those trying to re-establish their credit histories. Changes in your credit report have different effects on your credit scores. These effects are dependent on different factors, thus vary from one individual factor to another.
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Your credit score is an important element of your financial life. It can mean the difference between being approved or denied for credit, and whether or not you get a low or high interest rate. So, keeping a good credit score is essential nowadays. You should always keep an eye on your score by accessing your credit report. That will help you track your progress as you try to improve your credit score.