Components of a Credit Score

    Your credit score isn’t just for getting a mortgage. It paints an overall financial picture. The term “credit score” most commonly refers to a FICO score, a number between 300 and 850 that represents a person’s creditworthiness — the likelihood that, if given a loan, they will be able to pay it off. A higher number corresponds to higher creditworthiness, so a person with a FICO score of 850 is almost guaranteed to pay their debts, whereas a person with a 300 is considered highly likely to miss payments.

    The formula for calculating a FICO score was developed by Fair, Isaac and Company (now called, simply, FICO), and while the specifics remain a secret so that no one can game the system, FICO has made the components of the score public. The formula takes into account the following factors, in descending order of importance:

    1. Payment History – Have you made timely payments on your debt in the past?

    2. Amounts Owed – How many lines of credit do you have, and how high is the balance on each?

    3. Length of Credit History – How long have you been using credit?

    4. New Credit – Have you opened several credit accounts recently?

    5. Types of Credit Used – What combination of credit cards, retail accounts, installment loans and mortgages do you have?

    In general, the first two factors, payment history and amounts owed, make up 35% and 30% of the total score, respectively. The length of credit history accounts for 15% and the final two factors, new credit and types of credit used, account for 10% each. But those weights can vary for each individual borrower. Before applying for a loan, it’s a good idea to get a copy of your report and to learn your credit score. This will keep you from being unpleasantly surprised and can allow you to fix any mistakes on it.

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