A credit score mirrors your financial history. This simply
means how you have handled payments, debts and liabilities over a period of
several years. It is important to know your credit score before applying for a
loan, mortgage or a new credit card.
A credit score is basically a number based on a statistical
analysis of the credit report file issued by any of the three major credit
bureaus in the US – Experian, TransUnion and Equifax.
There can be a number of methods to calculate credit scores.
The most widely known type of credit score is, however, FICO score, which has
been developed by FICO (formerly known as Fair Isaac Corporation). Banks,
mortgage lenders and credit card providers, all use FICO score to ascertain the
financial capability of a borrower.
While a credit report is available for free (one free credit
report every year from each of the three credit bureaus), the accessibility to
your credit score is not without a fee, which is charged according to the FTC
regulation. Generally, the FICO score ranges between 300 and 850, and a score
over 600 is considered good, and can make you eligible to apply for loans at
most lenders.
Income is not considered when calculating a credit score, but
there can be several factors that can affect it. While it is not possible to
exactly determine the way how it gets calculated by the credit bureau, we know
about some components that make up a credit score.
- Payment History (35%): Make payments on time and avoid things like late payments and bankruptcies to maintain a clean payment history.
- Debt Burden (30%): High credit limit and low amount of debt can be the key to a good credit score. Pay special attention to credit card debt to limit ratio.
- Account History (15%): The older your credit account, the better is your score.
- Types of Credit Used (10%): Having a mix of different types of credit accounts, such as credit cards, mortgages and personal loans, can be quite helpful.
- Credit Inquiries (10%): Don’t apply for loans at too many lenders simultaneously. More lenders mean more credit inquiries, which can adversely affect your credit score.
