iQuanti: Your credit score is a vital financial metric. It can affect your ability to get loans and credit cards, buy a home, rent an apartment in some places, and sometimes even get a job.
But it can be hard to understand what impacts your score, who calculates it, and how they do so.
Below, we'll explain more about credit scores so you can be a more informed borrower.
Who Determines My Credit Score?
There are three credit bureaus that calculate your credit score:
- Experian
- Equifax
- TransUnion
They do this by gathering all sorts of information from various lenders with which you have loans or credit cards.
They each calculate a score using software created by the Fair Isaac Corporation (FICO) that runs your data through a complex formula. Credit scores start at 300 and can range up to 850, but the exact values of a "good" or "excellent" credit score depend on the scoring method used.
Is There More Than One Credit Score?
Your FICO score is perhaps the most important score to keep in mind because it is how the information from the credit bureaus is gathered and assessed.
However, each bureau gets slightly different information, so their scores may differ a bit.
There are other scoring models, too. For instance, the VantageScore model is used by sites like Credit Karma. It can help you estimate your credit score, but most people will use your FICO score to assess your credit.
What Impacts My Credit Score?
Your FICO score is determined by 5 factors:
1. Payment History — 35%
Payment history looks at how many payments you made on time. A history of on-time payments boosts your score.
On the other hand, late or missing payments can hurt your score.
2. Credit Utilization — 30%
Credit utilization measures your balances on each card and across all cards compared to each card's limit and your total limit.
To calculate credit utilization, you divide your total credit balance across all cards by your total credit limit across all cards. You can do the same for each card.
The lower the utilization, the better for your score because you're less likely to fail to pay back your balance. Generally, you want to stay under 30% on each card and across all cards.
3. Credit History Length — 15%
This looks at the age of your oldest and youngest accounts and your average account age altogether. A longer credit history boosts your score, because it offers more evidence that you're a responsible borrower.
4. Credit Mix — 10%
Credit mix looks at the types of accounts you have. More diversity leads to a higher score because it shows you can handle a variety of accounts.
For instance, having a car loan, credit card, and mortgage will be better in this area than just having a credit card.
5. New Credit — 10%
Each time you apply for credit, you undergo a formal credit check, called a hard inquiry. This damages your credit because in the lender's eyes, there's always a chance you're applying for new credit because you maxed out your other accounts.
The effect fades, and hard inquiries fall off your credit report after two years.
Credit Made Simple
Ultimately, lenders take a risk every time they lend money. Your credit score is a rating they can use to gauge that risk by estimating your chances of paying back your debt. There are many scoring models out there, but the three bureaus use FICO, and most lenders will factor your FICO score into lending consideration.
Boosting your credit score is a matter of proving you're a responsible borrower. So always make your payments on time and keep your balances low. Additionally, keep your accounts open but don't apply for credit too often. Keep at it, and your score will improve — and so will your financial opportunities.
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Original Source: The Plain English Guide to Credit Scores
