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Years ago your credit score was a big secret, known only to a select
few such as your mortgage and credit card companies. In 2000, Fair,
Isaac Co., the major supplier of credit scoring software, announced
they would begin sharing credit scores, also known as FICO scores,
with consumers.
What is a credit score? A credit score is a tool used by credit
grantors to determine your ability to repay your debts. The
information in your credit report is compared and evaluated against
tens of millions of other consumer credit reports which gives you a
credit score or number ranging from 350 (highest credit risk) up to
800 (lowest credit risk). A higher score means you are less likely to
make late payments or default on the credit extended to you. Your
credit score will change as the information in your credit report
changes over time.
Following is a short overview of the five major categories of credit
information that are used in determining your credit score and
guidelines for scoring higher.
PAYMENT HISTORY (35 percent)
Paying your current bills on time is the single most important factor
in obtaining a high credit score. This category includes credit cards
like Visa and MasterCard, retail accounts, installment loans such as
those for a car or education, loans from finance companies, and home
mortgages. Also included in this category are matters of public
record such as bankruptcies, liens, wage garnishments, and collection
accounts. The key to a higher score: Pay your bills on time!
HOW MUCH DEBT YOU CARRY (30 percent)
This category considers the amount of debt you owe on your various
credit accounts. If you've "maxed out" your available credit, this
could indicate that you are overextended financially and won't be able
to make your payments on time or repay your debts completely. This
category also examines how many of your accounts carry balances and
how much money you've already repaid. Closing accounts with a zero
balance does not generally improve your score in this area. The key
to a higher score: Keep your credit card balances low.
LENGTH OF ESTABLISHED CREDIT (15 percent)
The longer you've had credit accounts the higher you will score in
this area. The age of your oldest account and the average age of all
your accounts are used in determining your score. Old accounts that
have gone unused are also considered. The key to a higher score:
Establish good credit and keep accounts active.
APPLICATIONS FOR NEW CREDIT (10 percent)
Opening multiple credit accounts within a short period of time
represents a greater risk of becoming overextended. Each time you
apply for credit an inquiry is made into your credit history and these
inquiries show up in your credit report. A high number of credit
inquiries will lower your score.
Some inquiries are not considered in your score. These include:
requests by you for your credit report, inquiries from companies for
pre-approved offers or companies that already do business with you,
along with inquiries from potential employers. Some requests for
credit are treated as a single inquiry especially when you are
shopping for the best loan rate. The key to a higher score: Only
apply for and open new credit accounts when you need them.
YOUR CREDIT MIX (10 percent)
This category examines the types of credit accounts you have and how
many of each. Can a person have too many accounts? Yes and no. It
really depends on whether you have an established credit history or no
credit history at all. The key to a higher score: Open credit
accounts only if you intend to use them.
Don't despair if you have a low score or are just beginning to
establish credit. Your credit score will change for better or worse
depending on how well you understand and use these five keys to your
advantage in planning your financial future.
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