With so much emphasis on your Credit Score it is important to understand how your score is determined. Commonly referred to as your FICO (Fair Issac CO) Score, your credit score is a summation of complex algorithms used to determine your exact score. While the formulas are protected, we are given approximate percentages that help us understand what goes into making your score:
Payment history (35%) The largest factor determined on your FICO score is your basic payment history. The number of unpaid bills you have, any bills sent to collection, bankruptcies etc. The more recent the problem, the lower your score.
Outstanding Debt (30%) Are your cards maxed out? High balances or, more precisely, balances that are close to your credit limit, can negatively affect your score. Keep balances below 35%.
Length of your credit history (15%) How long have your accounts been open? The longer, the better.
Recent inquiries (10%) Every time you apply for credit of any kind you create an inquiry on your credit report. Multiple inquiries negatively affect your score.
Types of credit in use (10%) Current loans from finance companies. How many and how much.
Three major bureaus dominate the market for supplying American lenders with credit scores. When you apply for credit, it does not come directly from FICO; instead each bureau has its own version with its own name.
Equifax is called Beacon
Trans Union is Empirica
Experian is Experian/Fair Issac
How your Credit Score Affects You
How does a low credit score affect you? When dealing with most lending institutions, if your score falls below a certain predetermined number, you may only be able to qualify for a loan with a high interest rate.
In contrast, a healthy credit score of 680 or above can help you qualify for low interest rates on home loans and car loans. If you are considered to have a good or excellent credit rating then you can save 10's or 100's of thousands of dollars over the life of your loan.
Your credit score not only has an effect on your mortgage and car loans, but it can influence your credit cards, bank accounts, cell phone usage, and even your employment. It makes sense to ensure that all information is current and completely accurate. It's you who pays for mistakes on your credit reports.
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