Your credit score affects your ability to get loans to buy homes and cars, rent housing for you and your family, and in some cases, to secure a specific job. In short, it's a snapshot of your financial worthiness and overall stability. There are several scoring companies used, with FICO being the most-commonly accepted. The bottom line in ensuring that you build and maintain a good score depends on factors that indicate your ability to repay loans.
The FICO score is based on your payment history, the amounts you owe, the length of your credit history, your new credit, and the types of credit you used over your borrowing history. The Consumer Financial Protection Bureau says there is no hidden secret to building and maintaining a good credit history. Just pay heed to these factors that go into determining your FICO score:
- Payment history, 35 percent
- Amounts owed, 30 percent
- Length of credit history, 15 percent
- New credit, 10 percent
- Types of credit,10 percent
Inside the Key Credit Factors
Payment history. Credit reporting bureaus track whether you've paid off your debts in a timely fashion. This includes payments on mortgage loans, credit cards, and installment loans. Bankruptcies, foreclosures, liens, or wage attachments can kill your credit.
Amounts owed. Factors include how much you owe and to which kind of creditor. Even if you pay off your balance each month, the balances that are reported to credit agencies show the total balance on your last statement. Having a small balance indicating a history of on-time payments can serve you well.
Credit history. The length of your credit history, the length of existing credit accounts, and the duration of accounts that you haven't used can all play a part in the scores from this category. The historical length of good credit, especially with the same lenders, contributes to a higher score.
New credit. In many cases, applying for new credit won't necessarily hurt your credit score. However, suddenly applying for many credit cards at once causes credit bureaus to hit the panic button. It can indicate that you're grasping at a plastic lifesaver to make an end-run around your cash flow problems. By the way, lender inquiries for new credit stay on your record for two years, whether you use the credit card or not.
Types of credit. FICO examines your current credit by type (credit card, retail account, mortgages and installment loans) and by your mix of types. People without a credit card actually can be penalized by this assessment.
Lenders often look at other factors including your score. You may be turned down if you have been refused credit in the past. Lenders may also review your income, age, occupation, whether you're a homeowner and / or other factors that do not affect make up your credit score.
Now that you know how credit scores are calculated, it's a good time to get a new credit report. You may be unsettled if you find reporting errors. Disputes can be resolved by correcting or deleting the suspicious item. Each of the three credit bureaus accept dispute claims online, so it's up to you to study your own credit history and report all inaccuracies.