Understanding the Makeup of Your Credit Score

By: Anthony Kristovich Iii

Your credit score affects nearly every part of your life: your home, your home, your purchasing power. Learning what your credit score is, how it is made up, and how it is used is the first step into make the most of your credit abilities.

Credit scores are typically between 300 and 850, with the higher the number, the higher your credit score. The higher your credit score, the higher the likelihood that you will pay your bills. This is important for obvious reasons to lenders, which use your credit score to determine what you can borrow and what the interest rate will be.

Knowing what things are put together to determine your score is the best way to figure out how to improve it.

Fair Isaac Corporation (FICO score) has disclosed what items and their weight are used to determine their credit scores:
35% is the punctuality of past payments. Pay on time, and this is an easy one. One thing to note is that only payments more than 30 days past their due date.
30% is the total amount of debt you have. It is the ratio of how much debt you have, to how much debt you could have.
15% is the length of your credit history. This is talking about the length of each loan, and how long it's been around.
10% is the type of credit used (such as mortages, cars loans, or revolving lines of credit).
10% is the recent search for credit and amount of credit recently received.

Somethings like bankruptcies and foreclosures do not fit directly into the breakdown, though they are weighted obviously, so the percentage breakdown is only a rough guide.

Another note is that although your income and employment history do not affect your FICO score, they are obviously looked at when applying for a loan or a mortgage.

Having too many credit cards, a court judgement for payment, or a tax lien can also affect your FICO score as well.

Now, you may be wondering how to even know what you credit score is, to know if you need to do anything to effect it. According to the FACT Act, each legal U.S. resident is entitled to one free copy of their credit report from each of the 3 reporting agencies - Equifax, Experian, and TransUnion - once every 12 months. You do not have to request it from all 3 at the same time, however, so you can offset the request to receive a new report every few months.

So, you may wonder, why would you want to receive your credit report every so often. Afterall, things can't change that fast ... or can they?

There are a number of things you need to check for on a regular basis
- Identify Theft. This is a very easy way for your own credit score to get mangled.
- Errors. Finance companies have humans working at them, and humans can make mistakes. With a credit report, you can pick up mistakes and have them corrected by the institutions that made the mistake.

So now you are informed on what credit scores are, what they effect, and why are they important. Having a good handle on keeping a good credit score can literally save you money for years upon years on mortgages and loans.

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