Understanding Your Credit Score
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Credit score. The phrase embarks a feeling of dread and complexity. Why is your credit score so important? Where exactly does that number come from?
Your credit score is a number ranging from 300 to 850 that indicates how likely you are to repay debt based on past behavior. Financial institutions (credit unions and banks) use it to determine whether to give you a loan and the interest rate you will pay if they do. It’s also being used more and more by potential employers. Your credit report is basically the adult version of a report card on your financial trustworthiness.
So, what makes up your credit score? There are different ways to calculate your credit with FICO (Fair Isaac Corporation) being the most widely-used.
Your FICO Credit Score is based on five different factors:
35% Payment history
Are you paying your loans/credit cards on time?
30% Available credit
Your credit limit minus the amount you owe for each account. This is why it is a good idea NOT to max out your credit cards
15% Length of history
This is how much time it has been since each account was opened.
10% Number of inquiries
Yes, each time someone does a credit check that puts a mark on your credit
10% Type of credit
Mortgages, auto loan, credit cards, etc.
Now that you know how important your credit score is and what goes into it, make sure there aren’t any surprises. You can check your credit report annually for free through the credit bureaus at www.annualcreditreport.com.