When evaluating your credit history or deciding whether to lend you credit or not, most creditors will use your credit score and credit report to find information they need. Your credit score is a reflection of your credit worthiness and is used to access the potential risk (in credit repayment) that you are to creditors.
This might leave you to think, who decides your credit score and how is it calculated to get that particular number?
First, a credit score is calculated into a number that will potentially represent your risk of payment default with creditors.
When calculating this score, reporting agencies will take your information from your credit history and compare your information with those who have credit histories and profiles like yours.
The numbers or points are given and represent your credit worthiness. Your credit worthiness is very good if your score is high and you are considered a low risk borrower of credit.
This essentially means you are likely to pay your credit payments and less likely to fall into default. Of course just the opposite is defined with a low credit score, you are more likely to fall into default and more likely to pay back credit borrowed.
As reporting agencies decide your credit score, the do not consider your employment status or salary. That is why it is important to remember that your financial decisions will reflect your financial credit history. Your current finances will not be reflected in your credit score.
When your credit score is calculated, creditors will determine whether or not to approve you for credit, as well as the terms of credit and the interest rate in repaying the credit used.
Credit scores can also be used for creditors/lenders to decide whether your current credit should be extended.
Many professional businesses will use credit scores to determine credit worthiness of the consumer. These might include but are not limited to car dealerships, credit card companies, mortgage lending companies, insurance agencies, etc…
Your credit score can be used by these businesses to decide whether you will get a loan or not and what interest rate will accompany the line of credit. Keep in mind, your interest rate will be based on your credit score as well. The lower the score, the higher the rate and vice versa.
Fico Score Alternate Influences
There are a lot determining factors to consider when your credit score is numerically calculated. It can be different based on who requests to generate it, what information they will use to determine the score, and the reason it is being requested. Most scores can go as low as 300 and as high as 990.
Based on information needed and used, there are different models used to calculate your credit score. Let’s take a look of the factors used to determine your credit score.
One key factor that determines your credit score is your FICO score. A FICO score is calculated by a company known as the Fair Isaac Corporation. Many of these professional creditors use their scores. Your FICO score is compiled of a few different determining factors.
First, about 35% of the score comes from a history of your payment to creditors.
They will look at all of your accounts, whether they are past due, have late payments, turned over to collections as well as any foreclosures, repossessions, or bankruptcies. Any of these can have a negative, adverse affect on your FICO score and it can be something as small as being a couple of weeks late on a regular payment.
Next, the FICO company will look at all of your credit accounts.
This would include loan or credit cards. They will look at your balance, how much you pay, and what your credit limit is. The more debt you pay, the better your score will get. This makes up about 30% of your FICO score and 15% of that is taken from your credit history amount. The larger the history and longer you have had credit with debts being paid down regularly, the higher your score.
Should you have any new credit, the FICO company won’t frown upon it, but they would rather you have more of an established credit history. Having new credit will only affect about 10% of your FICO store. If you bounce around various small accounts and are consistently opening new ones, you will seem more of a high risk consumer because you appear desperate for credit.
Does The Type Of Credit Have Any Influence On Your Fico Score?
Keeping on the topic of factors that will determine your score, the FICO company will take the type of credit you have into consideration. They will look for a variety of credit, including credit cards and loans, such as mortgage or car loans. They want to see a good establishment in both revolving and installment credit accounts in your credit history. This will take up about 10% of your FICO score.
In addition to the above, a chunk of your score (about 65%) will be based on simple things that are the most important. Do you pay your bills on time and you have large outstanding balances in comparison to your actual credit limits?
The FICO company calculates your score and most fall between 300 and 850. Not many people have a score higher than 750, so if you do, you are doing great! Most creditors and lenders consider 750 a good score, so if you do not fall above that, you are still in good shape.
Low FICO scores are usually due to a consumer making negative credit decisions, such being late on payments, having their accounts turned over to collections, account balances and credit limit ratio is too high, small accounts not open for long, and high balances amongst outstanding accounts.
Just keep in mind when considering your FICO score number, do not open too many lines of credit, pay your bills/balances on time, keep a healthy balance in comparison to your actual combined limits, and always have a variety of credit, from credit cards to actual loans. All of these factors will help build and keep a positive FICO score, which will further help maintain a good credit history.
