Your credit score determines whether you can qualify to borrow money. It also determines the interest rate you will pay when you buy something on credit. If you have a high credit score, you can qualify for lower interest loans and ultimately pay back less money over the course of your life. Your credit score is based on formula developed by the Fair Isaac Corporation, called your FICO score. FICO scores range from 300 to 850, and whatsmyscore.org says most Americans score in the 600s or 700's. In addition to your score, you also have a credit report that contains details about your borrowing record. Three different companies maintain credit reports- Experian, TransUnion and Equifax.
How is My FICO Score determined?
Your FICO score is determined by several different factors. Thirty-five percent of your score is based on your payment history, and how responsible you have been about making on-time payments in the past. Thirty percent of your score is based on the amount of money that you owe to your creditors. Fifteen percent is based on the amount of time that you have had credit. Ten percent is based on whether you are applying for a lot of new credit. The last 10 percent is based on the specific types of credit you have used.
What factors impact my payment history?
There are a couple of different things that go into determining the part of your score that deals with payment history. Any bankruptcies or judgments against you affect this portion of your score. A bankruptcy or a home foreclosure has the most adverse impact on your credit score, and can stay on your credit report for up to 10 years from the bankruptcy. Likewise, if you settle a debt for less than what you owe (for example you have a short sale on a house) then this adversely affects your "payment history." In addition, even a simple late payment can lower your credit score. Creditors report payments that are 30 days late, 60 days late or 90 days late, and these records can also stay on your account for up to seven years and have an adverse impact on your payment history record.
Does carrying a balance lower my credit score?
Carrying a balance on your credit cards that nears the limit of your card can adversely impact your credit score. In addition, owing a lot of money in relation to what you make can impact your score. These two components make up the portion of your score determined by amount owed, or 30 percent of your score.
The first factor, the amount you owe in relation to the amount of credit available, is called your debt-to-credit ratio. Credit card companies do not like to see cards "maxed out." In other words, if you have $10,000 available to you, you should not borrow the whole $10,000. Your credit score would be higher if you had two cards with $10,000 available and borrowed $5,000 on each of those cards, than if you had one card with a $10,000 balance and a $10,000 limit.
The second factor, the amount you owe in relation to what you make, is your debt-to-income ratio. The more money you make, the more money you can borrow.
What if I open new credit cards?
Opening new credit cards hurts your credit score in two ways. First, when you open a new card the creditor will "pull" your credit report (request it from the company). This shows up as an inquiry. Having multiple inquiries lowers your credit score because creditors get nervous that you are running up large debts you won't be able to pay. Second, opening new cards lowers the average age of your credit accounts, which lowers your overall credit score.
What else can I do to improve my score?
Having a mix of different types of credit can help raise your credit score. You should try to achieve a good mix of secured loans (like mortgages and car loans) and unsecured debt (like credit cards). You also want to ensure that there are no mistakes on your credit report. You can obtain a free copy of your credit report annually from each of the three major credit bureaus, and should do this periodically to ensure accurate reporting of information and to protect against possible identity theft by looking out for any new cards opened in your name or other suspicious activity.
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