A credit score is a numerical representation of your creditworthiness. It is an evaluation of how likely you are to pay back a loan or credit card balance on time. Lenders, such as banks, credit card companies, and mortgage lenders, use your credit score to decide whether to lend you money, how much to lend you, and at what interest rate.
There are several types of credit scores, but the most widely used credit score is the FICO Score. FICO Scores range from 300 to 850, with a higher score indicating better creditworthiness. Here are the factors that go into calculating your FICO Score:
1. Payment History – 35% of your score
Your payment history is the most significant factor in determining your credit score. It tracks how well you’ve managed your past debts, such as credit cards, loans, and mortgages. Late payments or missed payments can lower your score.
2. Amounts Owed – 30% of your score
This factor looks at the amount of credit you’re currently using compared to your total credit limit. If you’re using too much of your available credit, it can negatively impact your credit score.
3. Length of Credit History – 15% of your score
This factor takes into account how long you’ve been using credit. It looks at the age of your oldest account, the age of your newest account, and the average age of all your accounts.
4. Credit Mix – 10% of your score
Credit mix refers to the types of credit you have, such as credit cards, loans, and mortgages. Having a mix of credit can be beneficial for your credit score.
5. New Credit – 10% of your score
This factor looks at how often you apply for and open new accounts. Too many inquiries can hurt your credit score.
It’s important to note that not all lenders use the FICO Score. Some lenders use their own proprietary credit score or another scoring model, such as the VantageScore. However, the factors that go into calculating these scores are similar.
To maintain a good credit score, it’s important to:
- Pay your bills on time
- Keep your credit card balances low
- Avoid opening too many new accounts
- Maintain a good mix of credit
Your credit score can impact many aspects of your financial life, including your ability to get a loan or credit card, the interest rate you’ll pay, and even your ability to rent an apartment or get a job. By understanding your credit score and taking steps to improve it, you can set yourself up for financial success.