Get acquainted with your credit score
I was looking at some of my previous posts tagged credit score, and this one caught my attention. If you're not sure what a credit score is, then you've come to the right place! In the next few paragraphs, I'll try to summarize for you what a credit score is, how it is used, and, how it is developed. Click here to see a video on the topic.
What a Credit Score is and how it is used
Your credit score is your financial lifeblood. Whether your applying for credit, a job, or insurance, chances are that somebody is looking at your credit score. A credit score is a number assigned to your credit history that helps lenders, employers, and, insurers determine the level of risk that your credit history represents. The lower your score, the higher the risk. The higher the score, the lower the risk. Although each user of the credit score has different cut off levels where they determine that anything below a score of XXX is too much risk, credit scores really even the playing field for all of us.
- People can get loan decisions faster
- Credit decisions are fairer
- Older credit problems count for less
Your credit report and the information that it contains directly impacts your credit score. For this reason, it is very important that you monitor the information that appears in your credit report. Recent changes to the law entitle you to a free credit report every year. You can start the easy process of getting your free credit report by clicking here.
Your credit score is calculated (developed) base upon five criteria:
- Your payment history- 35% of your score is weighted on how you have historically handled your credit obligations
- The amounts that you owe- 30% of your score is calculated based upon how much credit do you have available to you. Put another way, are you maxed out on your credit cards? The more credit that you have available to you, the better the effect on your credit score.
- Length of Credit History- 15% of your score is based upon much of your history is available. In other words, are you just starting out with credit, or have you had a long history of using credit?
- New Credit- 10% of your score is calculated based on how long it has been since you opened a new account. If you're opening a new credit account every month, this may have an adverse impact on your score. However, because only 10% of your score is based upon this factor, the overall impact here is small.
- Types of Credit in use account for the final 10% of your score calculation. Do you have a good mix of retail accounts (store cards), credit cards, and installment loans? Again, this is a small percent of the calculation, so the types and mix of accounts will not have a huge bearing on your score.
Keep in mind that items 3, 4, and, 5 by themselves won't have a big impact on your credit score. However, these items will have a big impact when all are considered together.
To get more facts about your credit score, get this free ebook from myFICO.com .