Credit Basics Your credit score shows whether you have a history of financial stability and responsible credit management. It can range from 300 to 850, but the higher the score, the better. Three credit agencies - Experian, Equifax and TransUnion - compile credit scores (also known as FICO scores) based on the information in your credit file. Each agency will report a slightly different score, but they should all paint a similar picture of your credit history. (For background reading, see The Importance Of Your Credit Rating.) Payment History - 35% The most important component of your credit score looks at whether you can be trusted to repay money that is lent to you. This component of your score considers the following factors: {{ul}} Amounts Owed - 30% The second-most important component of your credit score is how much you owe. It looks at the following factors: {{ul}} Length of Credit History - 15% Your credit score also takes into account how long you have been using credit. How many years have you been using credit for? How old is your oldest account, and what is the average age of all your accounts? A long history is helpful (if its not marred by late payments and other negative items), but a short history can be fine too as long as youve made your payments on time and dont owe too much. New Credit - 10% Your FICO score considers how many new accounts you have. It looks at how many new accounts you have applied for recently and when the last time you opened a new account was. The score assumes that if youve opened several new accounts recently, you could be a greater credit risk; people tend to open new accounts when they are experiencing cash flow problems or planning to take on lots of new debt. For example, when you apply for a mortgage, the lender will look at your total existing monthly debt obligations as part of determining how much mortgage you can afford. If you have recently opened several new credit cards, this might indicate that you are planning to make a bunch of purchases on credit in the near future, meaning that you might not be able to afford the monthly mortgage payment the lender has estimated you are capable of making. Lenders cant determine what to lend you based on something you might do, but they can use your credit score to gauge how much of a credit risk you might be. (For more on home loans, see 6 Tips To Get Approved For A Mortgage.) Types of Credit In Use - 10% The final thing the FICO formula considers in determining your credit score is whether you have a mix of different types of credit, such as credit cards, store accounts, installment loans and mortgages. It also looks at how many total accounts you have. Since this is a small component of your score, dont worry if you dont have accounts in each of these categories, and dont open new accounts just to increase your mix of credit types. (For information on reining in credit card spending, take a look at Take Control Of Your Credit Cards.) What Isnt In Your Score The following information about you is not reported to credit bureaus and is not reflected in your credit score: Have you paid your bills on time for each and every account on your credit report? Paying bills late has a negative effect on your score. If youve paid late, how late were you - 30 days, 60 days, or 90+ days? The later you are, the worse it is for your score. Have any of your accounts gone to collections? This is a red flag to potential lenders that you might not pay them back. Do you have any charge offs, debt settlements, bankruptcies, foreclosures, suits, wage attachments, liens or judgments against you? These are some of the worst things to have on your credit report from a lenders perspective. investopedia/articles/pf/10/credit-score-factors.asp
Posted on: Tue, 03 Jun 2014 02:43:49 +0000