What Is a Credit Score?

Your credit score is more than just a meaningless number; it is the key to your financial future. Your credit score can mean the difference between denial and approval for a credit card, home, or auto loan, and it can even affect your interest rates if approved. FICO scores range from 300 to 850, but what goes into determining your credit score, and what can you do to change it?

Where does a credit score come from?

What determines my credit score? The number is generated with a mathematical algorithm using key information found in your credit report. The number is designed to assess the amount of risk a financial institution is placing, which could potentially be extending you a line of credit. While there is a variety of credit scoring models in use, the FICO is the most common. In fact, according to FICO themselves, 90 percent of all financial institutions in the United States depend on FICO scores.

Five major categories make up your credit score: payment history, amount owed, length of credit history, types of credit used and new credit. Payment history, which makes up 35 percent of your credit score, takes account payment information like delinquencies and public records into consideration. Amounts owed, or how much you owe on your accounts, constitute 30 percent of your credit score. Statistics, like how long ago you opened the accounts and the amount of time that has passed since your last account activity, are taken into account for length of credit history, which constitutes 15 percent of your credit score. The mix of accounts you have, otherwise known as types of credit used, make up 10 percent, and your pursuit of new credit also makes up 10 percent of your total credit score.

Where do I stand with my credit score?

When combined and equated using the special mathematical algorithm, your credit score is created. Generally, those with credit scores above 700 are considered to have good credit, while those who sit at 770 or above have excellent credit and are considered very low risk to financial institutions. Fair credit tends to fall in the 600 to 700 range, and anything below 600 is considered to be bad credit, a poor investment for creditors. If you do not know your credit score, check out our free credit score estimator to get an idea of where you stand.

Although a bad credit score is detrimental, there are ways to improve it (with a secured credit card, for example). With enough persistence, financial planning and time, even the worst credit scores can be improved. While the path to good credit may seem daunting, it can make your life easier in the end. Those with good credit can lead rich lifestyles, in more ways than one.

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