Continuing with our Credit Score Mini Series, the post below talks about what actually goes into your credit score and how you can make sure everything is right with it.
You probably already know that your credit score can go a long way in determining whether you get a loan, what your interest rates might be and how well-regarded you are in the eyes of your credit card company. But what makes up that three-digit number?
What determines your credit score?
According to Experian, one of the three credit reporting agencies, most credit scores fall between 600 and 750. Anything over 700 indicates excellent credit management. Most banks are willing to take a risk on someone with a credit score of 720 or higher, but each lender is different; you might be able to get a loan with a much lower score, depending upon other factors.
The credit scoring models are proprietary, so it is impossible to explain exactly what each credit scoring company uses to determine your credit score. However, the common model developed by Fair Issac and Company – where the term “FICO” score originates – breaks down roughly like this:
- Payment history (35 percent). How well you pay back your debts holds the most weight with your credit score. Paying your bills on time, every time, can result in a higher credit score. Paying more than the minimum helps too. Late payments, slow payments or defaults can decimate your number.
- Amount owed (30 percent). The amount you owe versus your available credit helps determine your risk for making late payments or defaulting on your obligations. For instance, if you have maxed out all of your credit cards and you’re making only minimum payments, you might be seen as a bad credit risk.
- Length of credit history (15 percent). The longer your accounts have been open, the better. Old accounts that have been in good standing for many years are seen as a favorable asset. They prove that you can not only pay your debts, but you can pay them well over the long haul.
- New credit (10 percent). If you open several new accounts in a short period of time, your credit score could go down. If there are several inquiries from different companies for your credit report, that can also affect your credit score in a negative way.
- Types of credit (10 percent). This looks at how many different types of accounts you have open at any given time. That might include credit cards, installment loans, mortgages, car loans, etc.
How to check your credit
The three top credit reporting agencies – Experian, TransUnion and Equifax – can give you detailed information about your credit report, but they don’t disclose your credit score. To be certain that no strange activity is happening on your accounts, it pays to check out all three reports. You can do this once per year for free at www.annualcreditreport.com.
Finding your score can be a bit tougher. If you have been denied credit, the institution that denied you is required by law to disclose your credit score. But what if you haven’t been declined and simply want to know what that three-digit number is? If you are in the process of obtaining a loan for a home or a car, you could simply ask your lender what your score is. Otherwise, you might have to pay a fee in order to obtain it from somewhere like www.myFICO.com.
Finally, keep in mind that when you request this information about yourself, it is seen by credit reporting agencies as a “soft request” and is not included in the requests listed on your account. Thus, your own inquiries won’t affect your credit score.