All About Your Credit Score

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All About Your Credit Score

Your credit score is determined by using information stated in your credit report. It's the three-digit number ranging from
300 to 850 that helps institutions determine if you'll be offered credit, and at what interest rates. When talking about
credit scores, people usually refer to their FICO score. The actual formula is not known to many, but the components
that make it up is known to the public.

What makes up your credit score?

Payment History (35%)
On your total credit report score, 35% is based on your payment history. This makes your payment history the most
important factor used to calculate your credit scores.

Why is this the most significant contributor to your FICO score? It is because FICO believes that your past long-term
behavior can help predict what your future long-term behavior would be. Your public records, account payment
information and delinquencies (if any) comprise your payment history.

Utilization of Credit (30%)
This describes the percentage of the used available credit, as well as how you use and maintain your credit. Essentially,
the revolving debt is divided by the total available credit, so a lower ratio means a higher credit score.

FICO provides good scores to those who can handle their debt responsibly and maintain good credit. Those with the
best scores achieve around 7% ratio for credit utilization ratio, but reaching 10 to 20% is just fine. Because it's a ratio,
decreasing the credit amount or increasing the total available credit will improve your score.

Length of Credit History (15%)
The length of credit history describes the duration of your opened accounts, as well as the time since the account's
recent activity. This part almost always ensures that a person with a short credit history won't be getting an ideal score.
Having a longer credit history means more information stated in the report, thus giving a better idea of a person's
financial behavior and how a person manages his or her finances.

How can this be improved? Those new to credit should use it more, and those who already have it should maintain a
good credit history with long standing accounts.

Types of Credit Used (10%)
Having different types of credit (mortgages, car loans, student loans, credit cards) that are maintained well can increase
or improve your credit report score. The more diverse,  the better. FICO prefers having different kinds of accounts
because it shows that those who can handle installment loans and revolving credit represent lower risks for lenders.
This doesn't mean you should go out and apply for  every kind of loan possible, especially if you are not capable of
handling it; it's just 10% of the total score so you are better off maintaining the accounts you currently have.

New Credit (10%)
This small percentage covers your pursuit for new credit. This includes credit inquiries as well as your recently opened
accounts. To keep this component from declining, you should apply for new credit every few years. There is nothing
wrong with taking on additional credit as long as it is necessary and it makes sense financially. Applying for new credit
too often will hurt your score. If necessary, apply for new credit only once a year, or at least every 6 to 9 months.

It may look like a simple three-digit number, but your credit score can help you determine whether you will be approved
or denied for credit, or if you will be getting high or low interest rates. Understanding the components of your score will
greatly help in achieving ideal scores and get you to lines of credit you need.