A person's credit score is a measurement made by credit reporting bureaus to reflect a person's creditworthiness as compared to other people who have taken out credit. The system used by Fair Isaac Corporation (FICO), the inventors of the predominant credit scoring model, assigns a person a score between 300 and 850. Higher FICO scores are more favorable and may allow a person access to loans at a lower rates of interest. This score is informed by a number of different pieces of data.
Payment History
One of the main factors that influence a person's credit score is whether a person has paid his loans back on time in the past. The more loans that a person has taken out and defaulted on or paid late, the lower his score. In addition, if a person settles a debt for less than he originally agreed to pay, this will result in his score dropping. This factor makes up 35 percent of a person's score.
Amount Owed
About 30 percent of a person's score is made up of factors related to how much a person currently owes. The more a person owes to creditors, the lower his score will go. Credit reporting bureaus also modify a person's score according to his debt-to-credit ratio, also known as credit utilization ratio, which is the amount of debt a person carries relative to his credit limit. For example, if a person with a credit limit of $1,000 has $300 of unpaid debt on that account, he has a credit utilization ratio of 30 percent. The lower this ratio, meaning the more credit a person has available to him, the higher his credit score.
Length of Credit History
A person has 15 percent of his credit score determined by the length of his credit history. The longer a person has taken out credit, the longer his credit history and the better his FICO score. This history typically can be measured in two ways: the absolute length of his credit history (how many years he has been borrowing money) or the average length of his open credit accounts.
New Credit
Ten percent of a person's score is tied to a record of new credit. This includes new loans that a person has taken out as well as new lines of credit he opens. A person may also have his score affected by the number of credit inquiries he has also received. An inquiry occurs when a prospective lender pulls a person's credit report to assess his application for credit. This category also takes into account when a person re-establishes a positive credit history following past payment problems.
Types of Credit Used
The credit reporting bureau also bases 10 percent of a person's score on the types of credit he has taken out. Having a mix of types of credit will improve a person's credit score. For example, having both revolving credit (such as credit cards) and installment loans (such as a mortgage) tends to increase a FICO score.
0 comments:
Post a Comment