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.
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:
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.
There are five main components that determine your 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.