Credit Score Breakdown: Familiarize Yourself with the Fundamentals
Credit Score Breakdown: Familiarize Yourself with the Fundamentals
The significance of one's credit score in one's life is well known. Here we go with the simple part; the hard part is getting a handle on how credit scores are calculated. The Fair Isaac Corporation (FICO) model has been around since the 1980s and is by far the most popular way to determine a person's creditworthiness. The Fair Isaac Corporation collaborated with the three major credit reporting agencies—TransUnion, Equifax, and Experian—to create the FICO model.
The range of possible values for a person's credit score is 300 to 850. A respectable 690 is around the average American score. A 690 average will get you a loan, but it will not make you eligible for the best interest rate.
Here is a breakdown of the credit score for your review.
Payment history is the primary consideration. A credit score is 35% dependent on past due payments. How many times payments have been sent to collection agencies due to late or missed payments determines this. It takes into account any prior bankruptcies or tax liens as well. Remember that a missed payment has a far more negative impact on your credit score than a late payment, even if it might be tough to fulfill financial deadlines when a lot of bills come in at once. Your credit score will take a far bigger hit if you skip a mortgage payment than if you miss a payment on any other kind of bill or credit card.
After that, 30% of your credit score is based on your current outstanding debt. If all of your credit cards are at their maximum limits, it will reflect poorly on your credit score. On the other hand, if you have a variety of cards with plenty of accessible credit, it will reflect positively. The ratio of your outstanding credit to your available credit is a key indicator of your outstanding debt. Possessing a few unused credit cards can enhance your credit score since it shows that you have available credit.
After then, the length of time that your credit has been in existence is taken into account when calculating your score. Fifteen percent of your score is based on the length of time you have had credit. A high credit score is the result of consistent, on-time bill payments over an extended period of time.
The next thing to think about are the various forms of credit. The variety of your credit accounts accounts for about 10% of your total score. A higher credit score is the result of a well-managed mix of credit kinds, including a mortgage, auto loan, and credit card.
Finally, think about the level of activity. It is a good idea to open new credit card accounts that you will not use in order to raise your credit score, but it is not a good idea to open too many accounts at once. Your score will take a hit if there is an excessive amount of action happening quickly.
Improving your credit score is possible if you have a firm grasp of the components that go into calculating it.
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