Your credit score is an important factor in determining whether or not you are approved for a loan or a credit card. But, what exactly is a credit score? And, how is it determined?
Compared to the Masses
Essentially, your credit scores is a ranking of how you compare to millions of other people when it comes to being financially responsible. The number that is created from a variety of factors helps lenders know how likely you will be to pay your debts off and your bills on time. In fact, your credit score not only determines whether or not you get a loan, it also determines the interest rate you receive.
The Scores
Your credit score can range anywhere from 300 to 850. Those people with a credit score of 499 less are at the lowest end of the spectrum and are comprised of approximately 1% of the population. Those of 800 or more are at the high end and represent approximately 11% of the population. The higher your number, the better your chances of getting a loan and the better your interest rate will be. In fact, a person with a score of 720 will typically get a loan with an interest rate of 3.45 percentage points less than a person with a credit score of 520. On a 30 year mortgage of just $100,000, this means a difference of $85,000 in interest.
Information Used to Determine the Credit Score
A variety of factors are considered to determine your credit score. These include:
- Your bill payment history (35%) – your entire history is considered, though your most recent activity is the most important. Paying bills on time leads to a high score in this area.
- Debt to available credit ratio (30%) – the amount of money you owe on all of your loans (including credit cards, home equity loans, car loans, and mortgages) as compared to the amount of credit you have is an important determining factor. The more available credit you have as compared to your debt, the better your credit score will read.
- The amount of time you have had credit (15%) – the longer you have had credit, the higher your credit score will be.
- Type of credit (10%) – a mixture of credit types helps you earn a better score. Therefore, it is best to have revolving credit from credit cards as well as installment credit from car loans or mortgages.
- Credit applications (10%) – in general, having a large number of inquiries into your credit score has a negative impact on your credit. Therefore, you should keep these to a minimum. Shopping for car loan and mortgage rates, however, does not reflect negatively on your score.
What is Not Considered in Your Credit Score
Just as there are several factors that are used to determine your credit score, there are several factors that are not used. These include:
-Race
-Age
-Marital status
-Education
-Income
-Length of employment
-Type of employment
-Whether you rent or own your home
-How long you have lived at your current address
-Whether or not you have been denied credit in the past
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