A credit score, better known as a “FICO” score, (developed by the Fair Isaac Corporation), is a number calculated by various factors to determine a consumer’s lending eligibility. Credit scores can vary from a low score of 300 to a high of 850. The higher the score, the more lenders are willing to give because a high score shows that a consumer is responsible when it comes to using credit. A credit score of 550 and below is considered a “bad” score, 650-699 is a “fair” score, 700-749 is considered “good”, and a score of 750+ is considered an excellent score.
In order to build and maintain a great credit score, it’s important to understand what goes into calculating a score. A FICO score is broken down and weighed into five different parts:
Payment History (35%): This is the category that has the most weight in the calculation of a FICO score. Making payments on time is the most effective way to build a credit score and maintain a good one.
Credit Utilization (30%): How much credit you use makes a significant impact on your credit score. A good rule-of-thumb is to use 30% of the credit available to you. Of course, high balances can occur, but it’s important to pay those balances down as soon as possible to ensure that you don’t damage your credit score.
Length of Credit History (15%): The longer your credit accounts have been opened, the better. A lengthy history gives lenders a good background on the kind of borrower you are.
New Credit Accounts (10%): With each credit inquiry, your credit score takes a short-term hit. This tends to happen when someone is starting to build credit, but if you’re applying for new credit when it doesn’t make financial sense, then that can be a red flag to lenders.
Credit Mix (10%): It’s beneficial to you, as a borrower, to have a variety of loans. This means having installment (loans that have a set term and set payment) and having revolving loans (credit cards, lines of credits, etc.).
Now that you, as a borrower, have a better understanding of a credit score, you can be better prepared when applying for credit, know what lenders look for in a borrower, and know how to build and keep a good credit score.
Source: Credit Score Survey