Understanding Your Credit Score

Sep 27, 2017, 10:32 AM

In addition to knowing the importance of your credit score, you should also be aware of your credit report. Your credit report is something that holds the summary of your credit history. If you have used a credit card or taken out a personal loan, then you have a credit history. Your credit report is requested whenever you apply for a credit card or borrow money.


A credit report contains information such as:

  • Date (when you opened a credit account)
  • What amount you owe
  • Whether your payments are made on time or not
  • Whether you have missed any payments
  • Whether you have gone over your credit limit

A credit score is a three-digit number that is evaluated by using a mathematical formula, and displayed on your credit report. You are given points for actions that indicate you are a financially responsible person in regards to credit, and you lose points for actions that show you have difficulty managing credit.


Credit score ranges vary, depending on the lender. The most common criteria for a credit score is:

  • Excellent Credit: 750+
  • Good Credit: 700-749
  • Fair Credit: 650-699
  • Poor Credit: 600-649
  • Bad Credit: below 600

Your credit score is based on the following information gathered from your credit report. The following percentages aggregate your credit score:

  • Payment History – 35%
  • Total Indebtedness – 30%
  • Credit History Length – 15%
  • Credit Requests and New Accounts – 10%
  • Credit Mix – 10%

You might wonder why your credit score is so important. Different businesses use your credit score to determine how risky it would be to lend you money or sell you something. It depends on the lender to decide the lowest credit score that will still make you eligible for borrowing money. Your credit score can also be used by the lenders to establish the interest rate and credit limit on your loan.


Improving Your Credit Score

The formulas that are used for the calculation of a credit score are the private property of the companies, therefore they are not available to the public. It means that you cannot know exactly how many points you can gain or lose based on the actions you take. However, the factors that are mainly used for the calculation of your credit score are:

  • Payment History
  • Use of Available Credit
  • Credit History Length
  • Number of Inquiries
  • Types of Credit


Payment History

Your payment history shows:

  • When your bills are paid
  • Payments that are missed or late
  • Debts that were not paid
  • If you have declared for bankruptcy


Your score is damaged if:

  • You make late payments – the longer you take, the more your credit is adversely affected
  • You have accounts that have been sent to collection agencies
  • You have declared bankruptcy
  • There are disputes regarding payments, and the lender declares your payments to be late


To keep your score higher, you should always make your payments on time. If you have trouble paying a bill, you should immediately contact the lender to determine if it is possible to work out a special payment schedule.


Use of Available Credit

This is also known as credit utilization. To find out your available credit, add all the limits of your credit products and other loans. If you use a large sum of your available credit, then you are more of a risk, even if you pay all your payments on time and in full. To avoid this, you should try to use roughly 35% or less of your available credit.



Credit History Length

Your credit score will be lower if:

  • Your credit history is relatively short
  • You have no older accounts, and your credit accounts are newer


To help you in improve your credit score, you should keep an older account open even if you do not plan on using it again, especially if the account has no annual fee.


Number of Inquiries

Each time your credit history is pulled, your credit score is slightly reduced. Try to limit the number of times you apply for credit in a short period of time. Seek out credit when you really need to, otherwise it can adversely affect your credit score.



Types of Credit

If you have only one type of credit product, such as a credit card, then your score may be lower. However, if you own a mix of credit products, then you can improve your credit score – but don’t go overboard with it. Of course, with all types of credit, you should be sure to pay back the money you borrow, or else it will damage your credit score.



Your credit score is an important part of your credit report, but it is only aspect. Lender and insurance companies also factor in other things about your financials in deciding whether or not they want to lend money to an individual. If you have a good or excellent credit score, then you should make sure that you take the steps necessary to protect the score.

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