What is Your Credit Score Made Of?
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When discussing about credit and finances, we often hear the term credit score. A high credit score means quick approval, access to better rates, and more opportunities. But what really is a credit score? How do credit reporting agencies calculate a personâs credit score?
You and Your Credit Score
A credit score is a three digit number that is based upon an individualâs credit report. Credit scores range from a low 300 to 850 where 300 to 600 is considered to be a low score and 650 upwards is considered as a high score. Of course, a low score makes a person a âhigh-riskâ borrower and most lenders are not willing to approve applications from people who have a poor credit rating.
There are lenders who grant approval for people with poor credit but these transactions usually require some form of security from the borrower such as a property or an amount of money deposited and held by the lender. These deals are also often accompanied by higher interest rates, lower credit limits, and higher penalty costs to make up for the risks.
What is FICO Score?
FICO stands for Fair Isaac Company, which is the company that came up with the formula used in calculating credit scores. Although other methods are used in the past, the FICO score is the one that is widely used today.
Several factors make up a credit score. These are your payment history, level of debt, length of credit, inquiries, and types of credit contained in your credit report. Letâs take a look at each of these factors and how they influence your total credit score.
Payment history. Your payment history comprises 35% of your credit score. This is where the timeliness of your payment plays a big role. If youâre in the habit of delaying your payments, it can dramatically lower your total score.
Level of debt. This is how you put your allowable credit limit to use. It makes up 30% of your credit score. Financial specialists advise consumers not to go beyond 30-40% of their allowable credit limit as this can affect their credit score.
Length of credit. How long since youâve had your credit history is 15% of your total score. This is why college students are encouraged to start establishing their credit early by applying for a student credit card. This is also the reason why it is not advisable to close old credit card accounts even when you donât frequently use them.
Credit Inquiries. These are inquiries made by creditors whom you submitted applications to. It makes up 10% of your credit score. Thus, when applying for a loan or for a credit card, donât submit too many applications to different companies all at once. Submit only to the lender that you seriously want to get an approval.
Types of Credit. Types or mix of credit is 10% of your credit score. Having more than one type of credit in your account boosts your score as long as you keep up with your payments because it proves your capability in managing debts.