Over the years, so many people have asked me questions about credit; it is an important topic to everyone of us. It is also a complicated topic. Your credit defines who you are when it comes to borrowing money and there are many factors that determine your credit history. I wrote a series of articles for our local newpaper explaining credit which I want to share with you here. There are 3 posts in all; this one explains how credit scores are calculated:
When you apply for credit – whether for a credit card, a car loan, or a mortgage – lenders want to know what risk they will take by loaning money to you. FICO scores are the credit scores most lenders use to determine your credit risk. You have three FICO scores, one for each of the three credit bureaus: Experian, TransUnion, and Equifax. Each score is based on information the credit bureau keeps on file about you.
As this information changes, your credit scores tend to change as well. Your three FICO scores affect both how much and what loan terms (interest rate, etc.) lenders will offer you at any given time. Your credit score is based on many factors. FICO Scores are calculated from a lot of different credit data in your credit report. This data can be grouped into five categories as outlined below. The percentages of each reflect how important each of the categories is in determining your score:
- 35%- Payment History
- 30%- Accounts Owed
- 15%- Length of Credit History
- 10%- New Credit
- 10%-Type of Credit Used
A score takes into consideration all these categories of information, not just one or two. No one piece of information or factor alone will determine your score. For some people, a given factor may be more important than for someone else with a different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your score. Thus, it's impossible to say exactly how important any single factor is in determining your score - even the levels of importance shown here are for the general population, and will be different for different credit profiles. What's important is the mix of information, which varies from person to person, and for any one person over time.
Did you know the median FICO score in the United States is 723? For additional information about credit scores- go to MyFico and click on the link “Learn more about FICO scores”. There is a wealth of information that will help you better understand the credit score process.
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