When it comes to credit scores, the way yours is calculated may seem confusing. What's good? What's bad? How is a credit score calculated? Here are some Financial Facts for you:
What's good?
The best credit score to have is 720 or above. If your score is 720, there's really no need to try and raise it because lenders put you in the same category as people with higher scores. At 720, you are viewed as a safe risk and typically receive a loan without problem and at a low interest rate. However, if your score is below 700, it's definitely worth your time to try and raise it.
What's bad?
The average credit score in the United States is approximately 680. Anything below a 680 is considered “sub-prime”, or a bad credit score. However, each of the three major credit bureaus, TransUnion, Experian and Equifax, records your credit score slightly differently because not all lenders report to all three credit bureaus. In general, the higher your credit score, the better, especially if you want to apply for a loan or credit.
Here is how a typical credit score is determined:
Your payment history = 35%: Details regarding payments made on credit cards, retail charge cards, installment loans and mortgages play a part here. HAve your payment been on time? How much do you owe? If you've made late payments, how long ago did those payments occur? If you've got few or no late payments, your score will be improved. Also, recent late payments will hurt your score more than those made years in the past. Having a long history making of payments on time and no missed payments on all credit accounts is one of the most important items lenders look for.
Amount you owe = 30%: Owing a lot on many accounts won't necessarily hurt your score. But, if you are at, or near, your limit on your credit cards and other "revolving credit" accounts, your score will be compromised. This measures the amount you owe relative to the total amount of credit available. Someone closer to maxing out all their credit limits is deemed to be a higher risk of late payments in the future and this can lower their credit score.
Length of your credit history = 15%: In most cases, a credit report containing a list of accounts opened for a long time will help your credit score. The score considers your oldest account and the average age of all accounts. If you're just starting to build your credit history, there's not much you can do to improve your standing in this area over the short term.
You new credit = 10%: Opening several new credit accounts in a short period of time can lower your credit score. Also multiple credit report inquiries can represent a greater risk, but this does not include any requests made by you, an employer or by a lender who does so when sending you an unsolicited, "pre-approved" credit offer. Also, to compensate for rate shopping, the score counts multiple inquiries in any 14-day period as just one inquiry.
Types of credit you're using = 10%: You use of different types of credit - credit cards, retail accounts, finance company loans and mortgage loans - is also considered.
