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What is a Good Credit Score
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Overview:
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Learn the basics of credits scores and what they mean to your financial situation.
Not sure how your credit score affects your interest rate? Find out here.
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Your credit score is also known as your FICO score. FICO stands for Fair Isaac Corporation -
the company that developed the mathematical formula to determine credit scores. It's a
number that reflects your financial responsibility and helps lenders decide if you're a good
credit risk or not. Your score is based on - but not part of - your credit report. It's generated
at the time of request, then included with the report when requested by lenders.
What Determines My Credit Score?
The five main factors that determine your Credit Score are:
Payment History (approximately 35% of your score)
The factor that has the biggest impact on your score is whether you've paid past credit
accounts on time. However, an overall good credit picture can outweigh a few late payments
which will continue to have less impact over time unless the late payment is a mortgage
payment.
Amounts Owed (approximately 30%)
Having credit accounts and owing money doesn't mean you're a high-risk borrower. But
owing a lot of money on numerous accounts can suggest that you are financially
overextended and may be more likely to make some payments late or not at all. Part of the
science of scoring is determining how much debt is too much for a given credit profile.
Length of Credit History (approximately 15%)
In general, a longer credit history will increase your FICO score because it shows that you
can responsibly manage your available credit over time. However, even people who have not
been using credit very long may get high scores, depending on how the rest of their credit
report looks.
New Credit (approximately 10%)
People today tend to have more credit and to shop for credit more frequently. But opening
several credit accounts in a short period of time can represent greater risk - especially for
people with short credit histories. Requests for new credit can also represent greater risk.
However, FICO scores are able to distinguish between a search for many new credit
accounts and rate shopping. FICO scores generally do not equate your rate search with
higher credit risk.
Types of Credit in Use (approximately 10%)
Your FICO score will reflect a combination of credit cards, retail accounts, installment loans,
finance company accounts and mortgage loans. While a healthy mix will improve your
score, it is not necessary to have one of each, and it is not a good idea to open credit
accounts you don't intend to use. The credit mix usually won't be a key factor in
determining your score, but it will be more important if your credit report doesn't have
much other information on which to base a score.
Interpreting Your Credit Score: What's Good and What's Bad?
A high - or "good" - credit score can be in the mid-700s and higher. If you are below this
range, however, your credit score will list up to four reasons why your score is not currently
higher, and whether your credit report might contain errors. Knowing this can help you
figure out how to improve your score.
Here are nine common explanations for a lower credit score:
- Serious delinquency: You have one or more accounts with late payments.
- Serious delinquency and public record of collection filed.
- Time since delinquency is too recent or unknown.
- Level of delinquency on accounts: Your accounts are 60 to 90 days or more past due.
- Number of accounts with delinquency: You have numerous past due accounts.
- Amount owed on accounts: Your amount of debt is too high.
- Proportion of balances to credit limits on revolving accounts is too high.
- Length of time accounts have been established. New accounts.
- Too many accounts with balances.
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