Calculation of Credit Scores - A Guide
Do you know the importance of having a good credit score? It can be said that a good credit score can help you enjoy a better lifestyle. Read the article to know the importance of your credit scores and how your credit score is calculated so that you can work towards achieving a good score.
FICO credit scoring model - Its importance
FICO (Fair Isaac Corporation) is a publicly traded corporation. This organization has created the best credit scoring model. The credit score is actually calculated statistically on the basis of your credit report information. Your credit score is usually represented in a scale which ranges from 300 to 850. Usually a score higher than 700 is considered to be on the line of a good credit score.
It is said that your credit report is your financial report card and your credit score is the proof of your creditworthiness. It means whether you can be considered to be a creditworthy person to your future creditors. If you have a good score, it is easier for you to take out a loan at suitable terms and conditions. Otherwise, it might be difficult for you to qualify for a loan and at your suitable terms. So, you should try to have a good score in order to enjoy a good lifestyle.
FICO credit score formula - How it is calculated
The formula which the FICO uses is a top secret. However, there are guidelines on the basis of which your credit score is calculated. The score is calculated on 5 components which are discussed below.
1. Your payment history - One of the major components of your credit score calculation is your payment history. It constitutes about 35% of your credit score. It determines whether or not you have been able to pay back your debts on time. Several different accounts such as, credit cards, installment loans, any retail accounts, etc. are taken into consideration to compute this part of your score.
2. The amount you owe - This part is responsible for about 30% of your credit score. It determines how much you presently owe to your creditors. This is calculated on the basis of your owed amount against the amount you had taken out.
3. Types of credit you have - The types of credit accounts you have constitute about 10% of your overall credit score. The more types of credit you have, the better for you; that is, it will help you have a higher score since it will show that you can manage different types of credit accounts.
4. New types of credit - This determines about 10% of your total credit score. This is calculated on the basis of new credit accounts you have opened. It takes into consideration the number of accounts you have, the length of your credit accounts and any hard inquiries made by your creditors in a definite time period.
5. Length of your credit history - The length of your credit history constitutes about 15% of your credit score. The longer your credit history, the better will be your score. Therefore, never close your credit accounts suddenly.
While gathering knowledge regarding how your credit score is calculated, you must also be aware of the major credit bureaus, namely, Experian, Equifax and TransUnion. Not all creditors report to each of these three major credit bureaus; therefore, you should check your credit scores from each of the bureaus once a year. You should also pull out your credit reports at regular intervals and check out whether or not there are any mistakes in them. In case of any mistake, dispute it, so that you can have a clean credit record, which will help you have a good credit score.