September 20th, 2017 9:15 AM by Jackie A. Graves, President
A credit score is a number that lenders use
to determine the risk of lending money to a given borrower. Credit card companies, auto dealerships
and mortgage bankers are three common
examples of types of lenders that will check your credit score before deciding
how much they are willing to lend you and at what interest rate. Insurance companies, landlords
and employers may also look at your credit score to see how financially
responsible you are before issuing an insurance policy, renting out an
apartment or giving you a job.
In this article, we'll explore the five biggest things that affect
your score: what they are; how they affect your credit; and what it all means
when you apply for a loan.
What Counts Towards Your
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. Here are the elements that make
up your score and how much weight each aspect carries.
1. 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:
2. Amounts Owed – 30%
The second-most important component of your credit score is how
much you owe. It looks at the following factors:
3. Length of Credit History – 15%
Your credit score also takes into account how long you have been
using credit. For how many years have you been using credit? How old is your
oldest account, and what is the average age of all your accounts?
A long history is helpful (if it's not marred by late payments and
other negative items), but a short history can be fine, too, as long as you've
made your payments on time and don't owe too much.
4. 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 you've 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
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 can't
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.
5. 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, don't worry if you don't have accounts in each of these categories, and
don't open new accounts just to increase your mix of credit types.
What Isn't in Your Score
The following information about you is not considered in determining your
credit score, according to FICO:
What It All Means When
You Apply for a Loan
Following the guidelines below will help you maintain a good score
or improve your credit score:
The Bottom Line
While your credit score is extremely important in getting approved
for loans and getting the best interest rates available, you don't need to
obsess over the scoring guidelines to have the kind of score that lenders want
to see. In general, if you manage your credit responsibly, your score will shine.
By Amy Fontinelle - To view the original article click here