Understanding Your Credit Score
Your credit score is one of the most important numbers in your financial life, and, fortunately, it is easier to check your score now more than ever. Before you apply for a personal loan, credit card, or mortgage, it’s important that you know your score since it will give some insight regarding how much interest you can expect to be charged.
Checking your credit score also does not hurt your credit. And, even if you are not planning to intend for any credit, it’s a good idea to be aware of what your credit score is. Checking your score from time to time may alert you if fraudulent transactions on your card or banking accounts are pulling your credit score down.
What Is a Credit Score?
Your credit score is a three-digit number, which typically ranges between 300 and 850. This magic number tells lenders and credit card providers about your potential ability to pay back debts and how much of a credit risk you are. Credit scores are affected by a number of different factors, such as the length of credit history, your payment history, and more.
Types of Credit Score – FICO vs. VantageScore
There are two primary types of credit scoring models – FICO and VantageScore. However, many lenders in the U.S. have a preference for the FICO scoring model. Both types of scoring models have a number of similarities, like their score range and what has the biggest influence on the score, but they differ in terms of how the various factors that affect the score are ranked.
How are FICO Scores Calculated?
Payment history (35%): This is determined based on whether you have paid past debts on time.
Amounts owed (30%): This is determined by the total amount of credit that you are using at present in comparison to your total credit limit.
Length of credit history (15%): This is the length of the total time that you have had credit accounts for.
Credit mix (10%): The variety of credit products you have affects your credit mix.
New credit (10%): This is determined by how often you apply for new credit card accounts.