Sunday, 4 December 2011

What Is Included On An Overall Credit Score?

There are five areas of consideration that make up your credit score or what is also called your FICO score. Your credit score is a number the credit bureaus give you based on these five areas that we are going to talk about in this article. A lender will look at your score and the other areas of your report to make a decision if they will grant you a loan. Credit scores can also determine if you will qualify for a job, as many companies are now running credit reports on potential employees.

It is clear to see that building and maintaining a good score is an important part of your financial history and ability to get a better paying job and get you the best rates and terms on the loans you may want and need. To know how to improve your credit let's take a look at what makes up a credit history score.

If you can picture a pie chart, 35 percent of your credit score will be your credit history. The next slice of the pie totals 30 percent and is derived from the number of accounts and their balances that you have. The ages of your debt make up the next 15 percent of the pie chart. The balance of new credit on your credit report makes up 10 percent of your credit score. And the final 10 percent is accounted for the types of credit you have.

How your credit score is calculated.

Your credit history (35 percent) shows the lender your payment history. Making your payments on time can raise your FICO score. Missing or being late on a payment can lower your score 80 to 120 points. The credit reporting bureaus are looking for frequency and patterns of late payments to determine your credit history. Making your payments on time is the largest factor in helping to raise your credit score.

The bureaus look at the number of open accounts you have and the balances to help determine your current financial picture. Lenders look to see how much you owe comparing your earnings against your spending habits, this is also known as your income to debt ratio. Lenders don't like to see people with high debt to income ratios because they are more likely to default on a loan. This portion of your credit score helps credit bureaus determine whether or not you are over-extending yourself. Lenders like to see 36% or less debt load for most people to carry. Lenders like to see that you can control your spending in relation to your income.

The length of your credit history (15 percent) is made up from the ages of your accounts and how long since you have used these accounts. If you have had a credit card for ten years and have maintained a positive standing with that card, this will help increase this portion of your credit score. If you have faithfully been paying on a car loan for 3 or 4 years the credit bureaus will apply this to a positive credit score.

The next area that is considered when totaling your FICO score is the amount of recent debt (10 percent). Have you recently taken on 3 new credit cards and a new auto loan? If so, this may drop this portion of your credit score.

The final portion of your FICO score is derived from the credit mix (10 percent) your credit report shows. The bureaus look at number of unsecured accounts (credit cards) versus installment loans (car loans or mortgages). The credit bureaus are looking for a balanced mix of credit lines.

Knowing what in included in your overall FICO score can help you in maintaining a positive history report and high score. In addition, this knowledge could help you rebuild or develop a higher credit score.

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