Credit scores measure the risk of default on a loan. If you’re applying for a loan, the loaner will measure how likely you are to default based on established criteria and then make a decision if they think you’re worth the risk. Here are the 7 factors that affect your score:
- Loan repayment behavior – Have you paid back loans on time, or have you made late payments or missed payments.
- Credit score inquiries or requests for credit – When you check your credit, counter-intuitively, your credit score goes down. Applying for a loan also reduces your credit score. Save those inquiries and loan applications for when you need it.
- Delinquency – If you’ve defaulted on a loan, your credit score will drop.
- Length of established credit – If you’ve never had a credit card or a loan before, you is less likely to have a high credit score. Having a credit card, and paying the balance every month, boosts your credit score a little bit each year.
- Composition of credit – Revolving debt, such as with credit cards, affects your credit score differently than a loan that you pay back in installments. A variety of types of cards will benefit your credit score.
- Quantity of credit already available – The more you can borrow, the higher your credit score.
- Amount of outstanding loans – If you already have debt, you’re less likely to qualify for more debt.
The most widely used credit score in the United States is the FICO score. FICO is named for the Fair Isaac Corporation.
The FICO score is calculated according to the following categories:
Payment history 35%
Amounts owed 30%
Length of credit history 15%
New credit 10%
Types of credit in use 10%
FICO scores range from 300 to 850.
For more information on mortgages and credit:
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