Those looking to secure
a loan learn very early how important a credit score
really is. It can determine whether or not a lending
institution approves your loan application, and your
credit score also influences the interest rate offered
to you by a bank or other lending company.
A credit score is a number assigned to you based on
an analysis of your credit history. All of your credit
history information is entered into a computer. The
computer analyzes that information and then assigns
a number. The major credit ranking agencies do not use
the same software so you might be assigned a slightly
different number at each of them. Credit scores are
sometimes referred to as FICO scores. This is because
Fair Isaac Corporation (FICO) developed the software
most commonly used to determine credit scores.
What aspects of your credit history matter most when
you’re FICO score is calculated? Different factors
are assigned different percentages in the calculation
of your overall credit scores. Your payment history,
amounts owed and the types of credit you have are all
factors in your personal FICO score. Here is an approximate
percentage breakdown:
Payment History
Things like records of amounts and schedules of payments
(including late payments) accounts for 35%. Lending
companies see the length of time you’ve been past
due as well as the amount of time since you had a past
due payment.
Amounts You Owe
Any loans or a debt that you have outstanding is 30%
of your score. Lending companies have a chance to see
how many accounts you owe money to and what balance
you currently owe. They also take a look at your credit
lines and for indications that you might currently (or
in the recent past) have been overextended.
Length of History
This area accounts for 15%. Lending companies see how
long your accounts have been open and how much time
has passed since there was activity in your accounts.
The longer and better your credit history, the better
your scores will be in this area.
Types of Credit
The number and types of accounts you have makes up 10%
of your FICO score. You will receive a better score
is there is a variety of account types rather than just
credit card accounts.
New Credit
This area is also worth 10% of your credit score. Under
this heading, lending companies see the number of new
credit inquiries you have made and the number of accounts
you have opened recently. Banks and lending institutions
want to ensure that you are not trying to open a lot
of accounts at the same time and overextending yourself
and your financial obligations.
Now you might be wondering, what is considered a good
credit score? Credit scores usually fall between 350
and 850. The higher your score is the better. The higher
your score is, the less of a risk you are perceived
to be. Banks and other lending institutions feel they
are more likely to get their money back from people
with high FICO scores because these kinds of people
have a good history of managing and meeting their financial
obligations. The less of a risk you appear to be, the
more likely you are to have your loan application approved.
Have can you improve your card score? It takes time,
of course, but it’s never too late to start practicing
proper financial management strategies. Make sure you
pay your bills on time and keep your credit card balances
low. Also try to avoid opening a lot of new accounts
in a short period of time because this can alter the
score in the new credit section of your FICO score.
Lending institutions are looking for people that are
able to successful manage their financial matters so
it takes time to make a favorable impression if your
current credit report and score are poor.
You also want to take a close look at the information
on your credit report and ensure that it is all up-to-date
and accurate. If the credit agencies have incorrect
information to plug into the computer, then your FICO
score may not be correct.
Credit and debt can be difficult for anyone to handle,
but you need to remember that it is not only the amount
of debt you have that influences your FICO scores, but
also the manner in which you manage it.
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