What Your Credit Score Means

Creditors use a mechanism known as credit scoring to inform lending decisions. Simply put, the higher your credit score, the more favorably your loan application will be looked upon.

Conversely, the lower your score the less likely you are to find a “good” loan. In other words, lenders will still be willing to work with you — down to a certain point — but that willingness will come at a higher price.

With that understanding in place, here’s what your credit score means.

How Credit Scoring Works

Back in 1989, Fair, Isaac & Company (FICO) created an algorithm for predicting the likelihood of a given individual to repay a loan. The algorithm digests information provided to FICO by the big three credit reporting agencies (Experian, Equifax and TransUnion), and assigns a numerical value based upon the information it’s fed.

Ranging from 300 to 850, the score is based upon several weighted factors.

These include payment history, amounts owed, length of credit history, new credit applications and types of credit extended. Payment history accounts for 35 percent of the overall score, while types of credit extended account for 10 percent.

Exceptional credit scores range from 850 to 800. Very good scores rank between 799 and 740. Numbers from 739 to 670 are looked upon as being good. Fair scores run from 669 to 580. Anything 579 or below is considered very poor.

Credit scores in the 800 range can often get car buyers zero interest loans. The good news is borrowers with scores of 669 or less can still qualify for poor credit car loans.

Payment History — 35%

On-time payments to an appropriate number of credit lines will stand you in good stead everywhere. If you’re occasionally late, your score will fall a bit, but it won’t take a drastic tumble until you’re 30 days late with a payment — 60 days or more is even worse. Further, a late payment will continue to affect your score for seven years from the date of its reporting.

Amounts Owed — 30%

This aspect of your score is the ratio of the amount you owe relative to your overall credit limit. Basically, what it’s looking at is how much of the total amount of credit available to you is currently owed.

Let’s say all you the credit you currently have is one credit card with a $10,000 limit. If you’ve charged $9,000, you’ll have a 90 percent utilization rate and your score will be lower. If you’ve only charged $1,000, you’ll have a 10 percent utilization rate and your ranking will be higher.

The idea is to get a sense of how extended you are. The thought is the closer you are to your limit, the more likely you are to default. Ideally, you’ll keep your amounts owed below 30 percent of the total credit available to you.

Length of Credit History — 15%

This one is pretty straightforward compared to the two above. The longer your track record, the easier it is to predict what you’re likely to do. This is why new borrowers have lower scores than long time borrowers with a strong repayment history and low utilization.

New Credit — 10%

At some point, every account you have was new. In most cases, credit utilization goes along with life’s developments. As you grow in life your needs emerge and typically a credit account will be opened right along with it.

This usually happens gradually, over many years and your credit score won’t be affected by it too much. However, if you suddenly open five credit accounts within weeks of one another, the algorithm will “get suspicious” and lower your rating in response.

The tipoff comes with new credit applications. Each time you submit one; the lender requests your credit report. Along with those requests come a diminishing of your score. The only exception is when several inquiries for the same type of credit come in within a two to three-week span. The algorithm will assume you’re shopping for a good deal and count them as a single review.

Types of Credit — 10%

This last piece of your credit score reflects the fact some people are likely to put more emphasis on paying their mortgage than a credit card. In an effort to paint as detailed a picture as possible, the algorithm looks at how many different types of credit you’ve had. This enables lenders to get an idea of how responsible you are likely to be with different types of accounts.

Other Factors

Age and income level also play a role in determining your credit score. If you’re older, with a high income and score strongly in all of the above, you’re more likely to be closer to the “800” end of the spectrum.

Used by 90 percent of the foremost lenders in the country, what your credit score really means is the quality of life you’ll enjoy. Your credit score determines the interest rate you pay on loans. It’s also used to determine whether you can get an apartment and in some cases, even a job

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