Your Credit Score

Your credit score is a numeric summary of the information in your credit report and is formulated to predict your credit risk – the risk you will not pay what you borrowed. The most commonly used scoring model is the FICO score, created and issued by Fair Isaac Corporation, which ranges from 300 to 850. Generally, those with higher scores are more easily granted credit and get better interest rates. Many lenders require a score of at least 680 to get a mortgage, and those with a score in the mid-700s and above usually get the best interest rates. If your score is lower than 680, you may only qualify for sub-prime loans, which usually have a high interest rate or unfavorable loan terms, or find it difficult to get any loan. Requirements vary by lender; always check with your lender to verify minimum credit score requirements.

The following are the factors that are used to calculate your FICO score:

Payment history (35%)
Making your payments on time boosts your score. Conversely, if you make a late payment, your score will take a hit. The more recent, frequent, and severe the delinquency, the lower your score. Collection accounts and legal actions have a serious negative impact.

Amounts owed (30%)
Also known as the utilization ratio, which compares your balances to your credit limits on revolving accounts. Installment accounts are also considered but not as much, and compare your current balance to your original balance. Carrying large balances on personal loans and revolving debt, like credit cards, particularly if those balances are close to credit limits, will lower your score. A good benchmark for your utilization ratio is 50%—keeping accounts below this mark will help you to maintain a good credit score.

Length of credit history (15%)
This factor considers the average age of your open accounts. The longer you have had your accounts, the better.

New credit (10%)
This factor looks at the number and proportion of recently opened accounts and the number of inquiries. Accessing your own report is not damaging to your score nor are inquiries for pre-approval offers.

Type of credit used (10%)
Having a variety of accounts – both revolving and installment – boosts your score because it demonstrates that you are capable of handling the responsibilities that come with each debt type. Examples of revolving accounts include credit cards and lines of credit, while personal loans, car loans and mortgages are types of installment accounts.

Since your Equifax, Experian, and TransUnion credit reports do not necessarily contain the same information, your FICO score from each bureau may be different. When you apply for credit, the creditor may only check one of your scores or check all three and average them or take the lowest or middle score. If you are applying for a mortgage with a co-borrower, both of your credit scores will be taken into account during the approval process.

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