A credit score is the one number that sums up your credit habits and risk. These scores are determined by credit reporting agencies based on several factors.
Definition
The credit score used by lenders to determine credit-worthiness is also known as a FICO score, and FICO is an acronym for Fair Isaac Corporation, which created the FICO score in the late 1950s. FICO scores range from 300 to 850, with 300 being the lowest possible score.
Significance
Although the FICO ranking system's base is a score of 300, scores below 600 are generally viewed as a credit risk by most lenders.
Calculation
The exact calculation method used by Fair Isaac is not shared with the public, but, according to Mortgage News Daily, credit scores are determined based on these approximate ratios:
Payment history: 35 percent
Balances owed/available credit: 30 percent
Length of credit history: 15 percent
New credit: 10 percent
Types of credit: 10 percent
Other Factors
Too much activity on a credit report can affect credit scores. New inquiries for credit can lower your score by as much as five points, according to MyFICO.com's Credit Education Center.
Misconceptions
Your credit score is not the only determining factor for lenders when considering to extend credit. Lenders review your entire credit report to determine payment trends, but income and employment history are also taken under consideration.
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