A credit score is a number lenders use to judge potential clients. It represents the risk a lender assumes when lending a person money. For most of us, determining credit scores is easy. Step 1 below explains get your credit score. Understanding how companies go about determining credit scores is another matter. The most common credit score is FICO (which stands for Fair Isaac Corporation, the firm that markets the system). Steps 2-6 explain the factors that go into determining credit scores so you can understand how your own credit score was determined.
Instructions
1. Find out what your credit score is. Unfortunately, determining your credit score isn’t free. Offers of “free credit reports and credit scores” usually mean you must purchase a credit monitoring service and the free part is for an introductory period only. The best way to find out your credit score is to go directly to the three major credit reporting companies: Equifax, TransUnion and Experian. Under federal law they will provide you with a copy of your credit report once a year, but you will still have to purchase the right to see our credit score.
2. Evaluate your bill paying history. Making timely payments counts the most toward your total credit score (this is 35 percent of the FICO score). The main thing to be aware of is that very late payments (over 30 days past due) in your recent past will seriously hurt your rating on this part of the credit score.
3. Total what you owe to all your creditors. Too much debt is a warning sign to lenders and so lowers a credit score. A good rule of thumb is if you are able to meet all the payments required and still save at least a little each month, you are probably in good shape. Don’t underestimate the importance of this component of a credit score—it counts for 30 percent of the FICO score.
4. Check to see how long you’ve been paying bills without late payments. Recent history is weighted more heavily but the longer your “track record” of using credit responsibly, the better. This part of a credit score is 15 percent of the total.
5. List any applications you’ve made for new accounts in the last year. Stability is a big plus when lenders assess your financial behavior. Frequently opening or closing accounts will reduce your credit score. An important point to be aware of is that anytime you apply to open a new account, your credit is checked and the number of applications you make are counted. If you are turned down for credit, this is reported and counts against you. The good news about this part of the credit score, which account for 10 percent of the total score, is that it is short term. A person can raise his credit score within 6 months to a year simply by not applying for credit and not closing old accounts.
6. Divide your debt into different categories. The last part of the FICO scores (10 percent of the total) looks at the type of debt a person has. This is related to the total debt (see Step 3). People who have mortgages and are therefore hundreds of thousands of dollars in debt can and do have excellent credit scores. Others may owe only a few thousand dollars and find themselves marked down for having too much debt and then again for the type of debt they have. If you have a lot of credit card or other unsecured short term debt, this counts against you. Secured debt (like a car loan) and long-term secured debt like mortgages can be much larger in their dollar amount without lowering a credit score.
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