When you apply for a loan or credit card, one of the major resources lenders use to determine whether to offer you credit is your credit score. This number is based on all of the information on your credit report and reflects how risky it is for lenders to extend credit to you. The higher your score, the lower your risk to lenders.
FICO
FICO, which stands for Fair Isaac Corporation, is one of the main companies that calculate credit scores. The FICO score range is from 300 to 850, although most people have a score somewhere in the 600s or 700s. You actually have three separate FICO scores, one from each of the three major credit bureaus. The scores should be similar to one another, unless one of the credit bureaus has information significantly different from the others.
Getting Your Score
You can purchase your credit score from a variety of sources, including through the FICO website and through the Experian, Equifax and TransUnion websites. However, the scores through Experian and TransUnion use a different calculation and scale than the FICO score. The Annual Credit Report website allows you free access to your credit reports once per year but you have to pay for your credit scores. If you apply for a loan, you can also ask your lender to see your credit report and credit score that is being used to determine whether you are approved and what interest rate you get.
Components of Score
Your FICO credit score considers five major areas of data from your credit report. The first is your payment history, which accounts for 35 percent of your score. Payment history includes not only whether you have paid accounts on time, but also whether you have settled accounts, foreclosures or bankruptcies. Your amounts owed and proportion of your credit that you use account for 30 percent of your score. About 15 percent of your score is based on your credit history length, 10 percent is based on the types of credit you use and 10 percent penalizes you for new credit.
Improving Your Score
Having a good credit score is about managing credit responsibly over time. If you have made mistakes or do not have much credit history yet, focus on getting a few credit accounts and being consistent with them. Make all of your payments on time, pay down your balances on credit cards and loans and avoid maxing out credit cards. Apply for new credit only when you need it and keep your oldest accounts open to maintain your overall length of credit history.
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