What is your credit score out of?

What’s a credit score?

People holding up bannerA credit score (your credit rating) is a three digit number that indicates your creditworthiness. Credit scores can range between 300 to 850. A credit score of 300 is the worse possible credit score and 850 is the best credit score you can have. Mortgage lenders, banks, and credit card companies use credit scores to evaluate the lending risk to prospective home buyers and homeowners seeking a new mortgage. In short, lenders use credit scores to estimate the likelihood that you will repay the loan.

Did you know that you may have 3 credit scores?

Experian, Equifax and TransUnion companies are the three largest credit bureaus. These credit bureaus (agencies) calculate the credit risk differently, consequently, each credit bureau provides its own credit score. Lenders typically use the “middle credit score” associated with the 3 credit bureaus to evaluate whether the home buyer (or homeowner) will default on their debt obligations.

How your credit scores are calculated

The Fair Isaac Corporation (FICO), the largest credit score company has disclosed that a credit score formula can be divided into five components. Each one of the following categories can impact your credit rating:

Your payment history accounts for 35 percent

This category looks at your "on time" payment history and the types of credit accounts you make use of (i.e. credit cards, college loans, installment loans, mortgage, etc.). Judgments, bankruptcies, wage garnishments, liens, past due accounts (if any); plus any accounts in delinquency are considered.

The loan balances are 30 percent of the credit score

The total amount of money you borrowed (and owe) is calculated in the credit score. This part of the formula looks at whether you payoff your charge cards each month (and on time) or are your credit cards usually at the credit limit? The account balance in addition to the balance due on the open accounts influences the credit score. Add up the total amount on your charge cards and divide the amount owed by the credit card limits. Is percentage lower than 50% or more than 50%. Less is better. Credit balances should be 50% or less.

Account history: (15 percent)

You might be surprised to know that long account histories are viewed favorably by the credit bureaus. If you want to improve your credit score, avoid paying off your oldest credit accounts, even if they do not have a balance.

Also included in this category are the specific types of credit accounts (i.e. installment, auto, school loans, etc.). The amount of activity on these accounts weigh heavily on your Fico score.

New Credit Acquisition: (10 percent)

Be careful in pursuing new credit (i.e. new charge cards, installment loans, etc.). Credit inquiries and newly acquired debt can influence your credit score, because the credit scoring software can assume changes in lifestyle that may impact your capacity to repay not only the new loan but the existing lines of credit.

Types of Credit Used (10 percent)

Do you typically make use of charge cards and installment loans or do you avoid credit cards and installment loans (i.e. car loans, school loans, home loans, etc.). The type of credit you use is factored into your credit score.
Understanding your Fico® Score.pdf

Understanding Credit