Understanding Your Credit Score
Your credit score is a crucial factor when lenders evaluate your loan application. Learn what your credit score means and what goes into it.
What is a credit score?
Your credit score is a number that lenders use to predict how risky it is to lend you money. Sometimes called a FICO® score (which stands for Fair Isaac Corporation, the company that developed the formula) the score is used to determine your credit risk. The higher the score the lower your risk – and the better a loan candidate you’re seen as.
How is it calculated?
A credit score is obtained from information on your credit report. There are a lot of variables that go into calculating your score (depending on the lender and the length of your credit history for instance), but generally speaking the components that go into your score are:
1. How well you pay your bills. This represents about 35% of your score and includes your account payment history on accounts like credit cards, installment loans, mortgages, etc. It also includes the number of past due payments and total amount past due for each account, how long any accounts have been past due, how long since the last late payment, any bankruptcies or collection items and how old they are, and the number of accounts that you’ve paid as agreed.
2. How much you owe and how much available credit you have. About 30% of your score, this component includes the number of accounts with outstanding balances and calculates that amount as a proportion of your total available credit. Being very close to your credit limits is seen as a red flag.
3. Length of your credit history. About 15 percent of your score, this component lists the time since each account was opened and how long since the last activity on the account. The longer your credit history the better.
4. How much new credit you’ve applied for. About 10 percent of your score, this component looks at recently opened accounts and if you’ve applied for multiple types of credit in a short period of time. Periodically applying for new credit is fine, as is shopping around for a single loan. But if there are multiple inquires on your account for many new credit lines, than it can be a red flag.
Get Started Now!
- Check Your Credit Report & Credit Score now!
- Start a Loan Request
- Sign up for our News Feeds
- Have Questions? Call 1-800-GET-SMART (1-800-438-7627)
