what's in a credit score

31 May 2022

What goes into your credit score?

What goes into your credit score?

Credit scores are one of the most important factors in a person’s financial life. They are used to determine whether a person can get a loan, how much interest they will pay on that loan, and whether they will be able to rent an apartment or buy a house.

A good credit score can save a person thousands of dollars over the course of their lifetime. A bad credit score can cost a person thousands of dollars in interest payments and make it difficult to get approved for loans.

What is a credit score and why is it important?

what is a good credit scoreA credit score is a number that represents the risk level of a borrower. Lenders use credit scores to determine whether or not to approve loan and credit applications, and at what terms. A high credit score means low risk, while a low credit score means high risk.

Creditors use credit scores to determine the likelihood that a person will repay their debts. The three credit bureaus use different algorithms to generate credit scores, so your score may vary depending on which bureau is used.

Bottom line, a credit score is a key factor in your financial life. It’s important to understand what goes into calculating your score, and to take steps to improve it if necessary. By doing so, you’ll be in a better position to get the loans and credit cards you need, at the terms you want.

How did credit scores come to exist?

Credit scores were first developed in the 1950s by Fair, Isaac & Company, a financial services company. At that time, lenders were using a variety of methods to determine whether a borrower was likely to repay a loan. Some lenders used the borrower’s income and employment history, while others looked at the borrower’s character references.

Fair, Isaac & Company developed the first credit scoring system, which was called the FICO score. The FICO score was based on a person’s credit history, including their payment history, the amount of debt they had, and the length of their credit history. The FICO score became the industry standard for determining a person’s creditworthiness.

Today, there are many different types of credit scores. The most common type of credit score is still the FICO score, but there are also VantageScore and Experian credit scores, among others. Each type of credit score uses a different method to calculate a person’s creditworthiness.

Despite the different types of credit scores, they all serve the same purpose: to help lenders determine whether a borrower is likely to repay a loan. Credit scores are an important part of a person’s financial life, and they will continue to be used by lenders for years to come.

Different types of credit scores.

There are many different types of credit scores available to lenders, each with its own advantages and disadvantages.

Each type of credit score has its own way of calculating a person’s creditworthiness, so it’s important to understand how each one works before applying for a loan. The FICO score is the most widely used credit score, and it takes into account a person’s payment history, credit utilization, length of credit history, and other factors.

The VantageScore is a newer scoring system that uses a similar formula to the FICO score, but it puts more emphasis on recent credit activity.

The Experian National Equivalency Score is a less-commonly used credit score that takes into account a person’s education level and employment history in addition to their credit history.

No matter which type of credit score is used, it’s important to keep in mind that all scores are fluid and can change over time. A person’s credit score is never set in stone, and it can go up or down depending on their credit activity. With that being said, it’s still important to try to maintain a good credit score by making timely payments and keeping your balances low.

The different credit scoring agencies.

Most people are familiar with the two largest credit scoring agencies, Equifax and TransUnion. However, there are actually four major credit scoring agencies in the United States. In addition to Equifax and TransUnion, Experian and Innovis are also major players in the credit scoring industry.

Each of these credit scoring agencies has its own unique credit scoring model. As a result, your credit score can vary depending on which agency is used to calculate it. This is why it’s important to monitor your credit score with all four agencies.

While the specific details of each credit scoring model are proprietary and not publicly disclosed, we do know that they all consider similar factors in calculating your credit score. These include your payment history, credit utilization, credit mix, and length of credit history.

If you’re looking to improve your credit score, it’s important to understand how the different scoring models work. That way, you can take the necessary steps to boost your score with all four agencies.

Monitoring your credit score with all four agencies is the best way to ensure that you have an accurate representation of your creditworthiness. By understanding the different scoring models, you can take the necessary steps to improve your score and maintain a good credit standing.

How are credit scores calculated?

how are credit scores calculatedCredit scores are calculated using a number of factors, including your payment history, credit utilization, credit mix, and length of credit history. Your payment history is the most important factor in your credit score calculation, accounting for 35% of your score. This is followed by credit utilization (30%), credit mix (15%), and length of credit history (10%).

Payment history.

Your payment history is a record of whether you’ve made on-time payments on your debts in the past. This information is reported to the credit bureaus by your creditors, and it’s one of the most important factors in your credit score calculation. A history of late or missed payments will hurt your score, while a history of on-time payments will boost it.

Credit utilization.

Credit utilization is a measure of how much of your available credit you’re using at any given time. It’s calculated by dividing your total credit balances by your total credit limits. For example, if you have two credit cards with a combined limit of $5,000 and you’re carrying a balance of $2,500, your credit utilization would be 50%.

Credit mix.

Credit mix is a measure of the different types of debt you have. It includes revolving debt (like credit cards) and installment debt (like auto loans). Having a good mix of both types of debt can help improve your credit score.

Length of credit history.

Length of credit history is a measure of how long you’ve been using credit. The longer your history, the better it is for your score. This is because a long history shows that you’re a responsible borrower who can be trusted to repay your debts. Adding authorized user tradelines to your credit profile can be a quick way to increase the length of your credit history.

Types of credit.

Finally, types of credit (10%) are also considered when calculating your score. This includes things like revolving debt (e.g. credit cards) and installment debt (e.g. auto loans). Having a mix of both types of debt is generally seen as being low risk, and will help to improve your credit score.

These are the main factors that are used to calculate your credit score. However, it’s important to remember that your credit score is constantly changing, so it’s important to keep track of it and stay on top of your credit report.

What can you do to improve your credit score

1. Check your credit report regularly

By law, you are entitled to a free copy of your credit report from each of the three major credit reporting agencies (Equifax, Experian and TransUnion) every 12 months. Reviewing your credit report regularly will help you catch errors and identify any potential signs of fraud or identity theft.

2. Pay your bills on time

Your payment history is the most important factor in determining your credit score, so it’s important to pay all of your bills on time, every time. Late payments can severely damage your score, so it’s important to make sure you’re always caught up on your payments. If you’re struggling to keep up with your bills, consider setting up automatic payments or speaking with your creditors about alternative payment options.

3. Keep your credit card balances low

Your credit utilization ratio, which is the percentage of your credit limit that you’re using, is also a major factor in determining your credit score. To keep your ratio low, aim to keep your credit card balances below 30% of your credit limit. For example, if your credit limit is $1,000, try to keep your balance below $300.

4. Don’t open new credit cards unnecessarily

Every time you open a new credit card, it can slightly lower your credit score. This is because opening a new account increases your credit utilization ratio, which we discussed in the previous tip. So, only open new credit cards when absolutely necessary and be sure to keep your balances low on all of your cards.

5. Use a mix of credit products

Your credit mix makes up 10% of your credit score, so it’s important to have a mix of different types of accounts, such as revolving (e.g., credit cards) and installment (e.g., auto loans) accounts. This diversity shows lenders that you’re a responsible borrower who can handle different types of credit products.

6. Limit your hard inquiries

Every time you apply for a new line of credit, it results in a hard inquiry on your credit report, which can slightly damage your score. So, it’s important to limit the number of hard inquiries you have by only applying for new credit when necessary. If you’re shopping around for a loan or credit card, be sure to do so within a 14-day period, as multiple inquiries within this timeframe will only count as one.

7. Keep old accounts open and active

The length of your credit history makes up 15% of your credit score, so it’s important to keep old accounts open, even if you’re not using them. Additionally, lenders like to see that you’re using your credit regularly, so it’s a good idea to make small charges on your older accounts from time to time and then pay them off in full each month.

By following these tips, you can help improve your credit score and strengthen your financial standing.

What is a credit monitoring service and why do you need one

credit monitoringA credit monitoring service is a subscription-based service that helps you keep track of your credit report and score. This can be helpful in many ways, including detecting identity theft, monitoring for errors on your report, and helping you understand how your credit behaviors impact your score.

There are several different credit monitoring services available, so it’s important to compare features and costs before deciding which one is right for you. Some credit monitoring services will also provide other features, such as financial tools and advice, identity theft protection, and more.

While a credit monitoring service can be helpful, it’s important to remember that it is not a perfect solution. For example, a credit monitoring service can’t prevent identity theft from happening in the first place. However, it can be a useful tool in helping you keep track of your credit and protecting your financial health.

The benefits of having a good credit score

A good credit score can help you in many ways. For example, if you’re looking to rent an apartment, a landlord may check your credit score to decide whether to approve your application. And if you’re looking for a job, some employers may check your credit score as part of the background check process.

A good credit score can save you money and help you get approved for the things you want in life. So it’s worth taking the time to improve your credit score if it’s not where you want it to be.

The consequences of having a bad credit score

A low credit score could mean you’ll pay more for car insurance, mortgages, and other loans. In some cases, it could even prevent you from getting a job.

If you have a low credit score, you might not be able to get a loan at all. And if you do, you’ll probably pay more for it. That’s because lenders see people with low credit scores as higher-risk borrowers. To offset that risk, they charge higher interest rates and may require larger down payments.

In addition to making it harder to get loans, a low credit score can also lead to higher insurance premiums. That’s because insurers see people with low credit scores as more likely to file claims. To offset that risk, they charge higher rates.

A low credit score can even affect your employment prospects. Some employers use credit scores as a factor in hiring decisions, especially for positions that involve handling money. And if you have a low credit score, you might not get approved for a lease.

How to maintain a good credit score

There are a few things you can do to make sure your credit score stays healthy:

1. Pay your bills on time, every time. This is the most important factor in maintaining a good credit score.

2. Use credit wisely. Don’t max out your credit cards or open new accounts unless you really need to.

3. Keep your credit balances low. The lower your balances, the better your score will be.

4. Check your credit report regularly for accuracy. If you see anything that looks wrong, dispute it with the credit bureau.

5. Be patient. It takes time to build a good credit score, so don’t expect miracles overnight. Just keep doing the right things and your score will slowly but surely improve.

Conclusion

financial healthCredit scores are important to be aware of because they offer a snapshot of your financial health. They can help you qualify for loans and determine your interest rates. Credit scores can also impact your ability to rent an apartment or get a job.

Do you have any other questions about credit scores? Let us know in the comments below!

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