What Makes Up Your Credit Score?

/ BY / Credit Score

Your credit score is one of the most important indicators of not only how you handle your finances, but how willing lenders will be to loan you money for necessities such as a home, car, or financing for your education. But what exactly makes up your credit score? Knowing how a credit score is calculated can help ensure your credit score stays as high as possible and can also help you raise it if it's on the low end.

Credit scores 101

Before you know what makes up your credit score, you first need to know what your credit score is. When people refer to your credit score, they are most likely talking about your FICO score. FICO stands for Fair Isaac and Company, which is the company that developed the equation for determining your credit score. There are three main credit reporting companies -- Equifax, Experian, and TransUnion, each of which develop their own credit scores based on a number of factors. However, the FICO score is what is used by lenders.

Your credit score is a number from 300-850 and, through a complex mathematical equation, determines your financial risk. It takes into account such factors as whether or not you pay your bills on time, how much debt you have, and how long you have had debt. Lenders use your credit score to determine how likely you are to repay your financial obligations on time and base your interest rate on your score. The higher your credit score, the better.

As a general rule, scores are divided into the following groups:

  • Bad: 300-619
  • Fair: 620-699
  • Good: 700-759
  • Excellent: 760-849

Your credit score is important because it affects nearly every aspect of your financial life. If you have a low or fair score, you will find it difficult to get a loan or even rent an apartment. In the event you can get a loan, your interest score will be at a much higher rate than if your credit score was higher.

What makes up a credit score?

There are five main components that determine your credit score:

  • Payment history-35%. Whether or not you pay your bills on time makes up the largest portion of your score. Your score will suffer dramatically if you have bills more than 30 days past due, the length of time your bills are past due, any accounts in collections, and presence of public records such as judgments, bankruptcies, suits, or wage garnishments.
  • Debt to income ratio-30%. Also known as the amounts owed, how much money you owe versus how much money you make also plays a significant role in determining your credit score. If you have multiple lines of credit and they are all at or near their limit, your credit score will drop.
  • Length of credit history-15%. The length of your credit history also makes up a portion of your credit score. This is why people with no credit history have difficulty opening up new lines of credit.
  • New credit-10%. Multiple credit inquiries, number of accounts recently opened, and percentage of credit lines that are new also affect your score. A number of recent credit inquiries indicate that you intend to take on more credit, which can impact your ability to repay loans.
  • Types of credit-10%. The different types of credit you have, including mortgages, car loans, credit cards, and so forth also affect your overall score. Various types of credit are helpful to a credit score.

If your credit score is less than stellar, knowing what makes up your credit score can help you know how to improve your score over time.

    There are no comments.


Leave a comment

 

Please note your financial situation is unique and our tips & advice presented here may not be appropriate for your situation. CreditCardXpo.com recommends that you seek different advice & opinions from your own accountant or financial adviser who understands your individual circumstances before making any important decisions or implementing any financial strategy.