What is a credit score?
A credit score is a three digit number that is derived from a variety of factors on a credit report. Most lending institutions will use FICO scores to determine credit worthiness. (The acronym FICO comes from the brand name of a credit score calculation created by Fair Issac & Co in1956.) Each person has three FICO scores, one from each of the three national credit bureaus: Equifax, Experian, and TransUnion. Although the scores are often similar, there are times when discrepancies on one report may throw off your credit report.
Credit scores range from 300 to 850: the higher the score, the lower the perceived risk. According to Experian, the average score is between 650 and 700. Anything over 700 usually suggests good credit management.
Credit scores often play an integral role when banks decide whether or not you will be approved for a loan. The scores will also affect your interest rate. Usually the lower the credit score, the higher the interest.
Several key factors, each carrying its own weight, determine a credit score. According to Experian these include:
Payment History: Late payments negatively affect your score. Thirty-two percent of your credit score is a result of your payment history
Utilization: Twenty-three percent of your score is based upon your credit accounts. If you use large portions of your overall available balance, that is taken to indicate credit risk
Balances: The amount of reported balances affects 15 percent of your score. Recent increases in balances may be an indicator of risk
Depth of Credit: The length of your credit history and the types of accounts you carry makes up 13 percent of your credit score. A good mix of accounts, including instalment loans and revolving accounts, may have a positive impact on your score
Recent Credit: Ten percent of your credit score is based upon the number of recently opened accounts and credit inquiries. Applying for several new accounts can be an indicator of credit risk
Available Credit: The smallest factor taken into consideration is available credit. Seven percent of the overall score reflects your account balances.
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