Credit Scoring
Learn what your credit score is and how to improve it.
You may not even know that you have a credit score, but you do -- and it's used by credit card companies, home equity lenders, auto loan lenders, and finance companies when you apply for credit or a loan. Produced with a computer model created, most often, by Fair, Isaac & Co. (or "FICO"), a credit score is intended to be a snapshot, or summary, of your credit history. A low score can mean you don't get a credit card or loan, or that if you do, you will pay a higher interest rate. Also, some lenders use your credit score and other information to set the "price" for your loan.
Factors Affecting Your Credit Score
Although we don't know exactly how a credit score is determined, FICO considers the following factors (the approximate weight it assigns to each factor is in parentheses):
Payment history (35%). Your score is negatively affected if you have paid bills late, had an account sent to collection, or declared bankruptcy. The more recent the problem, the lower your score -- a 30-day late payment today hurts more than a bankruptcy five years ago.
Outstanding debt (30%). If the amount you owe is close to your credit limit, that is likely to have a negative effect on your score. A low balance on two cards is better than a high balance on one.
Length of your credit history (15%). The longer your accounts have been open, the better.
Recent inquiries on your report (10%). If you have recently applied for many new accounts, that may negatively affect your score. Promotional inquiries don't count.
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