You see a flood of commercials and ads on the TV, radio, and internet daily all talking about finding your credit score. It’s normal to feel like you should find your score, but what’s the point of finding your score if you don’t know what it actually means?
A credit score is a three digit number that is calculated using the data from your credit report. Your score may be just a few numbers, but those three little digits carry massive significance in your financial life. Your score is supposed to be an indicator of your “creditworthiness,” or, your ability to pay back loans. Your simple score can affect whether or not you are approved for loans and credit, what your interest will be, and it can even affect where you live and work.
How Can My Score Affect So Much?
These numbers mean so much in our lives because they are derived from your credit report, an extensive history of your credit and financial life. Your credit report contains practically all information regarding your use of credit. This report can be given to employers, landlords, and credit agencies. Each report is tailored slightly to account for the age and lifestyle of the individual. That being said, there is a standard model, the FICO model, that takes the information of the credit report, and uses it to form the score.
The FICO scores range from 300 to 850. They are comprised of the following factors.
- Payment History: This part of your report makes up 35% of your score. It includes your ability to pay back as well as any transgressions in payment.
- Amount Owed: 30% of your score, this portion looks at the amount of available credit you are and have been using.
- Length of Credit History: Length of your history accounts for how long ago you opened any accounts and how long ago your accounts were active.
- Types of Credit Used: This factor makes up 10% of your overall scores and examines the different types of accounts you use.
- New Credit: New Credit accounts for the last 10% of your score. It shows any credit inquiries and new accounts you have opened recently.
The weight of these factors can change slightly for the varying ages and other conditions of people. For example, people who are new to credit are placed in a special category where length of credit history does not matter as much.
The scoring model factors in all of these components to create a score. The score alone won’t tell institutions your entire financial background, but that’s not what it is designed to do. The score is designed to summarize all the information of the credit report into 3 numbers that show how likely a person is to pay back his or her loans in a timely manner. Most institutions will look at the complete report and acknowledge other factors. The score, however, is often a deciding factor since it was designed by mathematical functions. The information of the report can be hard to make sense of, but the numbers don’t lie.
For these reasons, institutions such as banks, lending firms, and even employers and landlords view your report and score. Your score is an indicator of your creditworthiness. These organizations want to know if you are a financial risk.
What Affects My Score?
The categories listed above make up your score. Still, you may be wondering what you do every day that changes that number. The concept is simple; have good credit habits, and your score will show it. Opening too many accounts to quickly and incurring substantial debt will worsen your score.
You score is a summary of your credit history. It is actually very important in many areas of your life. Having good credit habits will ensure a good credit score and, consequently, better opportunities.