Your credit score is a number used by lenders to determine the risk to loan money to a borrower. The number predicts the likelihood that you will pay your credit obligations on time.
The most commonly used version of your credit score is the FICO score which ranges between 300 - 850. According to experian.com 67% of all Americans have a good FICO score or better. A score below 620 makes it more difficult to borrow money at better interest rates.
What your FICO® Credit Score tells your lender:
What makes up your FICO ® Credit Score
Payment History
Most important factor for a lender is your ability to pay back your loan, and especially that you pay on time. Payment history determines 35% of your FICO ® score.
Late payments can affect your credit score negatively, and so do charge- offs, bankruptcies and debt collections.
The better your history paying back any money owed in timely manner, the higher your credit score.
Amounts Owed
Amounts Owed accounts for 30% of your FICO ® score.
In a very general sense, Amounts owed refers to how much debt you carry in total. However, the amount of debt you have is not as significant to your credit score as your credit utilization. When a high percentage of a person's available credit is been used, this can indicate that a person is overextended, and is more likely to make late or missed payments.
Length of Credit History
Accounts for 15% of your FICO® score
The longer your credit history, the more information about your general spending habits you provide to your lender. That's why a longer credit history is advantageous.
Type of Credit in Use
Determines 10% of your FICO® score.
This factor refers to the different type of credit accounts including mortgage, credit card, student loan, car loans etc. you might have. Having different type of accounts helps to proof to your lender your capability to manage a mix of credit.
New Credit
Accounts for 10% of your FICO® score.
New credit refers to all recently opened accounts. If you open many new credit accounts in a shorter period of time, you'll be seen as a riskier borrower because you're taking on a lot of debt.
Tips to boost your credit score
Every person's credit history and journey is very unique. Please note there is no solution that fits all! Following two basic rules, and keeping your credit card balances low and always pay your bills on time, helps to improve your credit score.
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Article Sources:
www.myfico.com accessed 12/30/2020
https://www.experian.com/blogs/ask-experian/credit-education/score-basics/what-affects-your-credit-scores/ accessed12/30/2020
www.vantagescore.com accessed 12/30/2020
https://www.ficoscore.com/ficoscore/pdf/Frequently-Asked-Questions-About-FICO-Scores.pdf accessed 12/30/2020