Posted on: Jul. 27, 2017 in Credit, Credit Score

Your credit score is one of the most important thing about you. It determines your eligibility for loans, apartments, and jobs. It can affect your insurance premium. It can also open financial opportunities or it can close them. The first step toward having your credit score work for you is to understand it.

Your credit score is a number between 300 and 850 that tells lenders about your borrowing and repayment history. Have you heard of FICO? That stands for Fair Isaac Corporation, just one of the many companies that calculate credit scores. While the different companies all operate a little differently or have different score scales, most use a similar collection of information about you to determine yours. Here are some factors that go into determining your credit score:

  • Payment history: How well you paid your bills is a major consideration. If you were late, have been sent collections, or have declared bankruptcy, your score will be lowered. Also, if you do not have a payment history because you’ve never borrowed money, your score will reflect this.
  • Outstanding debt: How much you owe already is also a factor, but it’s not the whole picture. Your debt-to-credit ratio is also important. That means that if you are close to your credit limit, your score will be negatively impacted.
  • Length of credit history: Simply put, your credit score is better if you’ve had account(s) for a long time.
  • New credit: If you’ve ever heard that opening new credit accounts can lower your score, it’s true. While it may seem like opening new accounts would help your debt-to-credit ratio, remember that the length of credit and payment history won’t be there on those new accounts. This isn’t to say you shouldn’t apply for new credit, just do so carefully and when needed.
  • Type of credit: This isn’t the biggest factor, but some credit scorers will look at the type of credit you have. Ideally, you’ll have a good mix of installment and revolving credit. Not sure what that means?
    • Installment credit involves a regular payment with a set end point. Examples include a mortgage, an auto loan, and student loans.
    • Revolving credit allows you to borrow from a line of credit, up to a certain limit, and as long as you continue to make payments you can continue to borrow up to that limit. Credit cards and home equity lines of credit are examples of revolving credit.

FICO is one of the most common scores, so we’ll use that as an example. According to FICO, the average credit score in the U.S. is 695, which is considered fair. How do the other scores shake out?

  • Excellent: 750+
  • Good: 700 – 749
  • Fair: 650 – 699
  • Poor: 600 – 649
  • Bad: below 600

A low score can hurt you, but it’s not necessarily a permanent problem. There are many ways to improve your score. Once you know how your score is determined, you can start to take steps to improve it.

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