Sunday, March 16, 2008

What our credit score includes?

Our credit score is a three digit number and its range varies from 300 to 850. Our credit score is a big indicator of how we are paying our bills and whether we will have problems in getting new credit or will get it with ease and with lowest of interest rates. Credit score is calculated using the information available in our credit history.

When we apply for new credit, the creditors and lenders check our credit score to determine our credit history. By viewing your our digit credit score, the creditors just decide whether to give us new credit or not. The creditors and lenders can decide the same thing by viewing our credit report. But checking our credit score make their decision making process quite easy and less subjective.

Although there are many versions of credit score available. But the most commonly used version is Fico score developed by Fair Isaac Company. Today Fico score is used by many creditors and lenders before making decision about providing new line of credit or extending the existing credit to the customers.

There are many parts of your credit history that taken into consideration when calculating your credit score. There are some parts in the credit history that are more important than the other one’s like your payment history. Here is the list of information that is used to calculate credit score with their percentage of use:

  • Payment history 35 percent: 35 percent of your credit score is determined by your payment history. Creditors and lenders are more interested in knowing how you have paid your bills in the past. If you are paying your bills late then they look at how late they are. Your late payments, collections and bankruptcy all affects the payment history part of your credit score.

  • Your debt level decides 30 percent: How much you are currently in debt deciding the 30 percent of your credit score. The amount of debt you have taken in comparison to your credit limit is known as credit utilization. The higher the credit utilization you have, the closer you are to your credit limit and more lower your credit score will have. And if the case is reverse, you will have higher credit score. The best key will be to keep your credit card balances to 30 percent or less to that of your credit limit.

  • Length of credit history determining 15 percent: the length of your credit history determines the 15 percent of your credit score. In general, the longer credit history is in favor of the customers and will help them in increasing their credit score. When you have a long credit history, the creditors and lenders will have better idea about your spending habits and paying habits as well. Thus factor also look at the age of your credit accounts and how long you have been using your credit accounts.

  • Credit inquiries 10 percent: approximately 10 percent of your credit score is determined by how many credit accounts you have established. This factor take into consideration the number of accounts you have, their age, your requests for new credit and the length of time since credit report inquiries were made by potential lenders. Every time we apply for a credit, an inquiry is added to our credit report and remained there for the next two years. When we make too many applications for new credit, that indicates that we are in dire need of credit or are in some form of financial problems. Credit score take into consideration the inquiries made within a year.

  • Mix of credit is 10 percent: approximately 10 percent of your credit score is based on overall mix of credit cares, loans, installment loans etc. The more balanced this credit mix is, the more credit score you have. In case you have different kind of accounts that’s in your favor as that indicates that you have experience in handling mix of credits.

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