Your credit score is a 3-digit number that reflects your overall credit-worthiness. Lenders use it to decide whether to approve you for a line of credit or a loan. Ranging from 300 - 850, your credit score is affected by how you handle your finances. Understanding how it’s calculated will help you make the right choices and make it easier to borrow money and get lowest rates possible.

Creditors view certain areas of your bill paying history as more important than others. Here’s the different factors that affect their decision and the importance of each area on your credit score:

Payment History - A full 35% of your credit score is determined by how responsible a consumer is in paying their debts on time. Lenders are less likely to approve a line of credit when bills are paid late or defaulted. Collections and bankruptcy also affect this part of your credit score. More recent delinquencies hurt your credit score more than those in the past.

Percentage of Debt - 30% of your credit score is the reflection of a healthy balance between allowable credit limits and actual debt. If you’ve maxed out your credit cards, this will result in a lower score in this area since 100% of your limits are being used. A healthy credit / debt ratio is 30% or less. In other words,  use 30% or less of the money you have available to you.

History Length - 15% of your score is based on how long you’ve been using credit - longer is better because it offers a longer, more varied history to consider. Keeping your older accounts open will help in this regard.

Credit Inquiries - 10% of your credit score is a balancing act between your need for credit and the number of requests to see your credit report. Too many inquiries may indicate a potential finacial problem or risk to lenders. While credit inquiries can remain on your credit report for two years, your FICO score calculation only considers those made within a year.

Types of Credit - 10% of your score is based on a variety of credit accounts. Although not a significant factor, having several types of credit is looked upon favorably when calculating your score.

Posted in Credit Tips

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