Definition of a Credit Score
It has been said that your credit score is more important than your SAT score. While the SAT determines the caliber of college you attend, your credit score or FICO score (named after Fair, Isaac, and Company) is a numeric tabulation of risk compiled by three different credit reporting agencies: Equifax, Experian and TransUnion. Lenders use your score to assess how willing they will be to lend you money and at what rate. The higher your FICO score, the most trustworthy you are and the more likely you are to secure low interest rates. Scores range from 300 to 850 points and are compiled using five different factors.
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Payment History
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Making regular payments on time accounts for 35 percent of your credit score. A single late payment can lower your score and make you seem untrustworthy. Other creditors, even those with whom you already have accounts, can cite this late payment as a reason to raise your interest rates. The best thing you can do for your credit is always make your payments on time, even if it's just the minimum payment.
Balances
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The next most important factor in your score is the amount of debt (your balances) you carry against the amount of money available to you (your lines of credit totaled). This is worth 30 percent of your score.
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Credit History
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Your credit history is just that: History. The longer your accounts have been open and maintained, the more trustworthy you seem. This accounts for 15 percent of your score. This is why many financial advisors recommend against closing credit cards when the balance is paid off. When the card is closed, that credit history is lost and your score drops.
New Accounts
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If you need to get several new credit cards or loans, space them out, because 10 percent of your score is dedicated to measuring how fast you open new accounts. Multiple requests in a short period of time makes it look like you are either trying to inflate your score by raising your credit limit or are being repeatedly denied for new accounts.
Types of Credit
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The last 10 percent of your score determines whether you have a healthy mix of credit. Lenders like to see that you can manage multiple types of credit successfully, such as credit cards, home loans and installment accounts. Most people are hurt for having credit cards above other types of credit.
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References
Resources
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