In most cases, the higher your credit score – the more it is going to benefit you when trying to receive lower interest rates on everything from home loans to balance transfers. Knowing about credit score is more than just paying your bills on time. Here is the breakdown of what factors are used when calculating the FICO Score:
Payment history accounts for 35% of your FICO score. Late payments have negative effect on credit scores (payments that are thirty, sixty or ninety days late appear on the credit report for up to seven years). Payments that have been defaulted and reported to collection agencies account for negative points on the credit report and should be avoided.
30% is calculated on current usage of available credit. Your debt to credit ratio falls under this category and helps potential lenders to assess the risk of lending to you. Multiple balances that are close to the credit limit increase the risk to lenders and should be avoided.
15% of the FICO score consists of past credit history. Accounts that have been opened longer and are accompanied with decent payment history increases your FICO score and decreases the risk that lenders face when loaning money.
New credit applications account for 10% of the FICO score. It is not a myth that opening numerous accounts in a short period of time can have adverse effects on the credit score. There are two types of inquiries; hard inquiries and soft inquiries. Soft inquiries are requested when the customer requests their own credit report, hard inquiries occur when car loans, credit cards and other credit applications request access to the credit report and FICO score.
The last 10% of the credit score is an assessment of how well the individual has been able to repay certain types of debt. Diversity within the report such as monthly accounts, loans, lines of credit and mortgages increase the credit rating as a diverse report creates a higher credit rating.
Knowledge is power, especially when it comes to your credit report. Use this knowledge to start improving your credit score.
