5 Components of a Credit Score

credit score componentsYour credit score is like a report card of how you manage your money, and like a report card, the better job you do, the higher score you will get. The most common credit scoring system used in the U.S. is the FICO score, which ranges from 300 to 850. The FICO score has five components that makeup the score, and each is weighted differently.

Credit Score Component 1: Payment History

Your history of paying bills and managing debt is the most important factor in your credit score. Payment history makes up 35 percent of your FICO score and takes account whether you have paid your bills on time. Instances of not paying your bills on time will lower your credit score. If you have accounts that are delinquent or get charged off because you went several months without paying them, your score will be lowered significantly.

Credit Score Component 2: Amounts Owed

The amounts you owe takes into account how much debt you have, especially in relation to how much open credit you have. You generally want your debt to equal less than 30 percent of your total available credit, so if you have a credit limit of $10,000, you should carry less than $3,000 in debt. This does not factor in debt from from loans such as a mortgage.

Credit Score Component 3: Length of Credit History

How long you have had credit makes up 15 percent of your score. Generally, all things being equal, someone whose credit history goes back 20 years will have a slightly higher score than someone whose credit history is only 15 years (your650score.com).

Credit Score Component 4: Types of credit use

Ten percent of your credit score is based on your mix of credit. To get the best credit score possible, you should have both revolving credit, such as credit cards, and fixed credit, such as a mortgage and car loan.

Credit Score Component 5: New Credit

Every time you apply for new credit, you get an inquiry into your credit report, and certain types of inquiries can slightly lower your score. New credit also shortens your credit history, which can slightly lower your score as well.

Credit Score TO BUY A HOUSE

If you’re wondering what kind of credit score is needed to buy a house there are many great resources available such as this one: http://your650score.com/650-credit-score-mortgage/

Make sure you understand the 5 steps outlined above, and you will be well on your way to a successful financial future.

2015 National Average Credit Score

There are three numbers that will define you throughout your adult life; your age, your social security number, and your credit score. It is essential that you know and protect them all.

Most people are familiar with the term FICO Score, named for the Fair, Isaac, and Company founders. FICO is a scoring system that measures credit risk and worthiness. Since its introduction in 1958, use of the scoring system has spread nationwide and is the most commonly used measure for establishing credit. Credit scores are determined by five factors; payment history, outstanding debt, credit history, new history, and a miscellaneous factor that considers factors like types of outstanding debt.

Today, a consumer’s credit score can be attained through the three major credit bureau’s; TransUnion, Experian, and Equifax. The credit bureaus collect information on credit lines and payment history which is applied to the FICO formula to calculate a consumer’s credit score. Credit scores range from 300 to 850.average credit score

Currently, the national average credit score is as of April 2015 is 736. Nationally, 60% of the population have a credit score of 700 or better. Credit scores have been recently improving, following a period of decline as a result of the recent recession.

A new credit measure, developed by the three major credit agencies, is being introduced to provide more consistency between bureaus and improve credit ratings. The VantageScore has a range of 501 to 990, with higher scores indicating less risk and more creditworthiness. The system is also developed to help evaluate newer credit consumers, making it easier to determine their credit risk. There are also five factors to the VantageScore formula; payment history, recent credit, and balance are aligned with the FICO measurement. Depth of credit, which consider the mix and information availability of credit information slight differs from the FICO formula. An additional factor is also included, available credit, which includes a measure of the consumer’s access to credit.

Of your three major life numbers, only the social security will stay the same. Age, as long as we are fortunate, will continue to increase. With proper management, so will your credit score will also increase, although it could go either way. The way to move your score in the right direction is the keep bills paid on time, decrease debt, decrease outstanding credit, and avoid applying for new credit.

Sources: 2015 WWW.Money-Zine.com Credit Score & Your 650 Score