A credit score is a way for mortgage lenders and other companies to know if you make your payments on time. Fair Isaac Corporation (FICO) has a formula that is used for calculating your credit score. This calculation gives companies a way to figure out how much risk you pose as a borrower.
There are several things that effect your FICO score. These include your payment history, how much you currently owe, how many and what types of credit cards you have, and the length of your credit history.
Payment History
Your payment history makes up 35% of your FICO score. It includes whether you are paying your bills at all, paying them on time, or whether a collection agency had to go after you for payment of a bill. The quality not the quantity of your payment is key to getting a good score in this area. Pay your bills on time even if it is the minimum payment. If you need help with paying your bills, call the company and set up a payment schedule with them. Showing such financial responsibility may help your score.
How Much You Owe Now
30% of your score is made up by how much you currently owe in loans, credit cards, or other bills. If you pay all of your bills on time, you'll have a high score in this area. Even an occasional late payment won't hurt you much. Be careful, though, not to max out your cards, avoid paying your bills or ask for a lot of loans. This behavior will greatly effect your FICO score in a negative way.
New Credit Cards
About 10% of your FICO score involves recent activity for new credit cards. Be sure to avoid signing up for several new credit cards and asking for loans all in a short period of time. This can put a "red flag" on your record and make it look like you are unreliable and at risk of not paying your bills. Sign up for one new credit card at a time and let that credit get established before signing up for another card.
Credit Type
Another 10% of your FICO score involves the type of credit activity you have. The more variety you own, the better. For example, if you have various lines of credit like a mortgage, credit card, and a finance account your score will be given more positive points than if you owned only 19 credit cards. Again, payment of these bills, no matter how many, is key to receiving a high score.
Establish Credit
15% of your FICO score is based on how long you've had credit. It is important to establish some credit in order to qualify for loans or other financial aide. This can take time but once you begin to establish a good credit history, you want to keep this credit active throughout your life. You may want to begin by opening up a retail credit card or a less desirable card for several months before you can receive other credit opportunities. Maintaining good credit habits will determine that you are responsible enough to have a positive FICO score. Keeping these habits throughout your life will keep you in good standing with creditors.
FICO score range
The higher your FICO score, the more creditors see you as someone who is able to pay off a loan on time and pose less credit risk. A score of 720-850 is the best score range you can receive. 700-719 means you have good credit and will be able to receive positive financing terms. A score of 675-699 means that you are still in a positive range. A score between 620-674 may give you trouble getting favorable financing. With a score between 560-619, you may have trouble getting any financial terms. And if you receive a score of 500-559, it is time for you to work on improving your credit.
Keep Credit Cards Active
Even if you are not using your credit cards, don't close them down. You want to still maintain a good credit history even if they are not being used. The longer you have good credit, the more easily you will be able to approach lenders for loans in the future.
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