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How Is Your Credit Score Determined?

Your credit score is one of the most important things you can possess. This score determines whether a lending institution will grant you a car, personal, or home loan. It also determines the interest rate you will have to pay for such a loan. It also determines the interest rate charged by credit card companies. The better your credit score, the better the interest rate you will receive.

Since this score is important for so many things, it is beneficial to know exactly how it is determined. By knowing this information, you can work to increase your credit score in order to qualify for better rates. Credit scores are determined by the Fair Isaac Corporation, or FICO for short, and range from 300 to 850. Credit scores calculated by FICO are used by over 90 percent of lenders. From a lender’s perspective, a score of 300 is seen as very risky, while people with scores closer to the 800 range are viewed as secure borrowers. The formula used to calculate credit scores is very specific. Thirty-five percent of the score is based on payment history, thirty percent on amounts owed, fifteen on length of credit history, ten percent on the amount of new credit, and ten percent on the types of credit used by the consumer.

Taking this formula into account, there are a few basic things that can be done to ensure that you have the best possible score. First, since thirty-five percent of the score is based on payment history, it is essential that payments are made on time, every time. A single missed payment can be devastating to a credit score. It is also important that you have not maxed out every available line of credit. It is usually recommended that only fifty percent of a person’s available credit is used at any particular time. This shows a good credit to debt ratio, and increases a your FICO score. As fifteen percent of a credit score is determined by the length of credit history, you should try to use your oldest credit cards before you use new ones. Other than that, the length of credit history can only be improved by time. You should also be sure to have various types of credit available to you. This can include installment loans, credit cards, and other types of loans. Using various types of credit will improve your credit score.
 

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