The Basics of Credit Scoring
A credit score is a number calculated from information on your credit reports. Generally, the higher the number, the better your credit history.
Credit scores help predict the likelihood that you will pay your credit obligations on time and as agreed.
People with better (higher) credit scores are likely to present lower risk to lenders and other businesses than people with lower credit scores.
Two significant factors affect your scores:
whether you repay your debts on time and as agreed, and
how much you currently owe on each account compared to the credit limit or original loan amount. This is your credit utilization rate.
There are multiple producers of credit scores, and each producer may have several types of scores. One well-known company is Fair Isaac Corporation or FICO.
VantageScore is another scoring model.
What Makes Up a FICO Score?
Your payment history accounts for 35% of your score. This shows whether you make payments on time, how often you miss payments, how many days past the due date you pay your bills, and how recently payments have been missed.
How much you owe on loans and credit cards makes up 30% of your score. This is based on the entire amount you owe, the number and types of accounts you have, and the amount of money owed compared to how much credit you have available.
The older your length of credit history grows, the better the impact tends to be on your credit score. The length of credit history is worth 15% percent of your FICO Score
Maintaining a mix of credit demonstrates that you can handle multiple types of loans. Along with the other elements above, improving your credit mix can help you reach excellent credit score status. Building a financially secure future is a game of inches, so even a portion as small as 10% of your credit score should be taken seriously.
New credit makes up 10% of a FICO® Score. When you apply for new credit, inquiries remain on your credit report for two years. FICO Scores only considers inquiries from the last 12 months. People tend to have more credit today and shop for new credit more frequently than ever.
Your credit utilization ratio, generally expressed as a percentage, represents the amount of revolving credit you’re using divided by the total credit available to you. Lenders use your credit utilization ratio to help determine how well you’re managing your current debt. To improve your credit utilization ratio, it’s generally best to pay down your outstanding debt. Depending on your situation, it may also be appropriate to consider increasing your credit limits on an existing account to increase your Fico Score. If you want to maintain a low credit utilization ratio, try to
estimate how much you spend on credit cards each month. Multiply this by 10 and use that as a target for the available credit you want to have across your revolving accounts. You’ll then be able to maintain your average spending while keeping your utilization rate around 10%.