A credit score is a number assigned to you based on a formula developed by the Fair Isaac Company (FICO), and this number is used by creditors to help determine your creditworthiness. The credit score is based on a complex mathematical formula that involves several factors. A change in each factor can affect how other factors influence your score. However, information in several standard categories is used to calculate the FICO credit score. You can get an estimate of your credit score by plugging your information into a calculator provided on the MSN Money website.
Payment History
Payment history accounts for about 35 percent of your credit score, according to to the MyFICO website. This means building a history of making timely payments on bills, including mortgage, rent, credit cards, car payments and other loans. A number of late or missed payments have a negative impact on your score, and having a credit account in collection is particularly damaging. Once an account has entered collections, it is on your credit report for seven years, even if you pay it off.
Amounts Owed
Amounts owed count for about 30 percent of your credit score. If you owe a lot of money, particularly if it is a large percentage of the credit available to you, this affects your credit score negatively. Lenders are concerned about extending credit to someone who is already overburdened by debt. The credit utilization ratio -- the percentage of your debt relative to your credit limit -- is a factor in this category as well. A high credit utilization ratio has a negative impact on your credit score. To improve your credit score, MSN Money writer Liz Pulliam Weston recommends paying down existing debt and reducing credit card balances to no more than 30 percent of your credit limit.
Length of Credit History
Length of credit history counts for about 15 percent of you score. You might think that operating on a cash basis and never using credit would give you a stellar score. However, lenders want to see that you know how to handle credit before extending it to you. If you don't have a credit history, lenders don't know how you'll handle credit. Sometimes you can add accounts -- such as cell phone bills -- to your credit report with the three reporting agencies, and that provides a little credit history. Obtaining a credit card and using it sparingly and paying off the balance also establishes credit.
New Credit
New credit counts for about 10 percent of your score. If you open a lot of accounts or if creditors make a lot of inquiries about your credit as a result of numerous credit applications, it indicates to creditors you may be getting in over your head financially. If a number of inquiries are made in a short period about the same kind of loan, such as a mortgage or car loan, the credit reporting agencies typically count that as one inquiry, because many people shop around for the best loan rates. From a creditor's perspective, shopping for the best loan terms is an indication of a responsible borrower.
Types of Credit Used
Types of credit used counts for about 10 percent of your score. There is good debt and bad debt. Good debt is money owed on things that will increase in value: mortgages, student loans and business loans. Installment loans from banks and credit unions as well as home equity loans are viewed as relatively good debt. Credit cards, retail credit cards and other unsecured loans or loans on items that depreciate quickly are seen as bad debt. The more your credit report reflects good debt, the more it improves your credit score.
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