In the simplest terms your credit score is your credit history calculated in figures. There are many methods which can be used to calculate your credit score but the most common method is the FICO. FICO was developed by the Fair Isaac Company and is the preferred method used by most lending companies. Your credit score determines whether a lender will approve your application or not or whether a lender will give you less rates on your payments or not.
Credit scores or FICO scores generally range form a low of 340 to a high of 850. Ideally, you should aim for a score of at least 700 or more. If you get a score of 600 and below, creditors will likely consider you as a high risk borrower.
Knowing how your credit score or your FICO score is calculated will help you become more aware of your spending and your payment habits. Let’s consider the break-down of categories used to sum up your credit score.
What comprises your credit score?
35% of your credit score depends on how good of a payer you are. If you make it a point to pay all your bills promptly, you should have no problem obtaining the complete 35% of your credit score. However, if you’re in the habit of delaying or skipping payments, or if you defaulted on some of your debts, your credit score will also be affected.
30% of your credit score is calculated based on the level of your debts. Do you always maximize the use of your credit limit? Were there instances that you’ve even exceeded your credit limit? If so, then you’ll likely get a low score on your credit utilization. Hence, borrowers are advised to keep spending below their credit limit. As much as possible, keep your balances at least 50% lower or even less of your credit limit
15% goes to the length of your credit history. How long has it been since you started your credit report? The longer your length of credit history is, the better your score will be. This is because, the more information your creditors can get out of your credit report, the better they can gauge you as a borrower. This is why it is very important to establish a good credit report as early as you possibly can. Also, this is the reason why you should always think twice before closing accounts that you’ve had for a long time.
10% of your credit score is based on inquiries. If you’re in the habit of submitting credit card applications just for the heck of it, your credit score can be affected. Also, whenever a creditor denies your application, it can also have an impact on your FICO score. Thus, before submitting any application, see to it that you really intend to get an approval out of it.
The other 10% of your credit score is based on mix of credit. If you have a credit card account, a car loan, a mortgage loan and various types of insurance policies, it will show your flexibility and dependability as a creditor. If you’ve been able to manage all these different types of accounts without any problems on your payments, then you’ll likely get a perfect score on this category.
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