Credit score explanation: What makes up your credit rating?

One may apply for credit for any number of reasons, whether it is to buy a car, build or buy a house, or a student loan, or for education.

However, there is one number that typically determines whether you can get a loan, and how much it will cost you. Your credit score, a three-digit number, basically rules your life, if you are like most people who use credit on a regular basis.

Your credit report contains a ten year history of your life as a consumer - how you have paid your bills, whether any of your payments have been missed or late, how much credit you have, any bankruptcies and convictions, and anything else that affects your creditworthiness.

Your credit score is the concise sum total of all that information, condensed into one single three-digit number that affects how much you pay for any credit product. This is a very basic credit score explanation. Let’s go deeper.

Your credit score is calculated on the basis of your past ten year credit history. It gives potential lenders a simple decision making tool to asses risk for people applying for credit or loans.

A simple number helps lenders to quickly identify the risk of lending to an applicant. Although the same result is achievable by reviewing the credit report, the credit score is much quicker and a lot less subjective.

A key element of any good credit score explanation tells us that points are awarded, based on information contained in the credit report, and the final score that is arrived at is compared to that of other consumers.

This information allows lenders to predict whether someone is likely to repay a loan or to make their mortgage payments on time. Credit scores make it possible for consumers to get instant credit, at electronic stores, department stores, furniture stores, etc.

The exact formula of how the score is calculated is proprietary information owned by the Fair Isaac Company. However, a basic, credit score explanation, or breakdown of how the score is calculated is as follows:

First, about 35 percent of your credit score is based on payment history. One of the main concerns of a lender is if you pay your bills, and on time. The credit score will be instantly affected by bills that have been paid late, the number if bills that had to be sent out for collection, bankruptcies, and so on.

About 30 percent of your credit score is based on your outstanding debt at the given point in time. The total amount that you owe on a car or a home loan, the number of credit cards you have, close to or above their credit limits, and so on. The larger numbers of cards you have close to their limits, the lower your score. It is advisable to try to keep your card balances at less than 25% of their limits.

Another 15 percent of your credit score is based on the total length of time that you have had credit, of any sort. The longer that you have had established credit, the better for your credit score.

Another 10 percent of your score is the number of inquiries on your report. Every time you apply for more credit, an inquiry is made, and noted, on your credit report. If you apply for a lot of credit cards or loans, it will indicate to the lender that you may be in financial trouble or taking on too much debt.

A final 10 percent of your credit score is the types of credit you have. The number of loans and total available credit from cards makes a difference.

Now you have a complete credit score explanation. Remember, however, that you don’t need to be overly concerned with your credit score is you don’t use credit. Living debt free is definitely the best way to go.

» Credit Score Numbers - What’s In A Simple Score?
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» Credit Score Rating Scale - FICO vs. Vantage
This is more than one credit score rating scale. FICO is certainly the best known, but Vantage is another scale that is utilized by more lenders today.

» Excellent Credit Score - What A Score Says About You
An excellent credit score is based on many factors. The more you know about these areas of your financial life, the more able you are to manage your credit in a positive way.

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