Your credit score determines your eligibility for auto loans, mortgages, insurance services, and other financial services. Additionally your credit score determines your insurance rates and interest rates for loans and mortgages.
What is Your Credit Score?
Your credit scoreis a three digitscore based on your past record of paying back debts and loans to financial institutions, as well as various other factors from your financial history.This score indicates the likelihood you’ll pay a loan back after you’ve borrowed it. Banks, lenders, and insurance companies use these scores to determine if they should lend you money, and at what rate. If you’re interested in purchasing a new car, and want to get an auto loan, your credit score determines whether you’ll be approved and at what interest rate. The better the score, the lower the interest rate that you’ll have to pay.
FICO is the most common credit scoring method. The score is based on information provided by the three major credit bureaus (Experian, Equifax, and TransUnion). These credit bureaus provide FICO with the information it needs to determine your credit score.
How is Your Credit Score Calculated?
Your credit score is determined by a variety of factors that forecast the likelihood that you’ll pay back a debt.
35 percent of your credit score is determined by your payment history. If you’ve have had late payments in the past, bankruptcies, judgements, liens, repossessions, foreclosures, or any other similar financial issues then your credit score will drop.
Another 30 percent is determined by your debt burden. The amount you owe, whether it’s for credit card payments, or amounts outstanding for previous loans affects your FICO score. For example, the amount owed on all your credit cards and balances is one factor. If you have a high percentage of your credit utilized, that may factor against your FICO score. Owning several nearly maxed out credit cards will also hurt your FICO score.
15 percent of your credit score will depend on the length of your credit history. If you have had accounts for many years, your credit score will generally be higher. The average age of your accounts and the age of your oldest account are both important factors.
10 percent of the score is determined by the types of credit in use. Consumers who have shown a past history of using different types of credit successfully are likelier to have higher credit scores. There are three major types of credit; installment, revolving, and open.
What’s a Good Credit Score?
There are a variety of FICO credit scores. The classic FICO score is the one we’ll focus on this article. It ranges between 350 and 850, and the higher the score the better. According to FICO, the median classic score is 711. That means 50 percent of consumers have a FICO score above 711. Each lender has its own standards in terms of FICO scores, but if you’re in the top 50 percentage of customers (I.e above 711) you are doing pretty well for yourself and you should be able to get fairly good interest rates.
How to Find Your Credit Score
Every person is entitled to one free credit report each from the three major credit bureaus (Experian, Equifax, and TransUnion) once every year. Your credit report includes comprehensive information about your credit such as the amount of credit you have available, how often you pay your bill on time, the amount of credit you’re using, bankruptcies, liens, judgements, etc. Basically it provides a very thorough snapshot of your current financial and credit situation, which helps lenders decide whether they should lend to you or not. Your credit report also gives you a thorough bird’s eye view of your credit, and ways to improve.
However, your credit report does not include your credit score. You’ll have to pay an extra fee to find out your exact credit score. Finding your credit score is typically fairly cheap and well worth to help you know where you’re at in terms of credit. For example, Equifax gives you 4 credit scores and reports each year for 16.95$/month, along with 24/7 monitoring of your credit.
If you keep an eye on your credit, you can easily increase it by improving on your weak points. There are numerous methods to improve your credit, but they all require you to first understand your personal credit situation thoroughly.