Credit Score Defined: What Is It and What Affects It?

The credit score is a calculation of credit risk that is determined from using data

provided by credit reports which is then expressed as a number between 350 and 800. Specifically, certain information found on your credit report is weighted more than other information. The score is calculated using a standard mathematical formula.

Several things affect your credit score. What affects your credit score the most is payment history. Simply put, if you have a poor history of meeting your payment obligations, then this will be reflected in your low credit score. Late payments, while not as bad as simply defaulting on a loan, can have a substantial negative impact. Particularly important is your current payment history. By this, I mean your payment history in the short term. If you have recently missed a couple of payments and are 60 days late on a credit card, your score will be much more impacted by this than if you were late on a payment three years ago.

The next thing that affects your credit score is your debt ratio. If you are drowning in debt, most institutions know you are more likely to default on payments than someone who is carrying a manageable debt load. For this reason, it is important to pay down your debt. Never settle for making just the minimum payment. Making minimum payments is a road to financial misery. Not only do you end up paying huge amounts of interest but a change in your debt ratio will be much slower.

Finally, the type of debt you are carrying is important. Responsible people tend to have mortgage loans, car loans, and student loans. Irresponsible people tend to have five credit cards maxed out and are making minimum payments. You see, it is all about behavior. That is what the mathematicians at Fair Issac are trying to capture each time they refine the credit score formula. What is the difference between a responsible and an irresponsible consumer? Institutions must know this in order to make better loan decisions.

Credit scores aren't evil. If you change your behavior, pay down your debt, and make payments on time, then you'll see positive results in just a few short months. Sure, it will probably be a little while before you reach a score of 800. However, improving your credit score can be done and people do it everyday. You first need to find out what your credit score actually is and then make a plan. It is as simple as that.

Credit Score Defined: What Is It and What Affects It?

By: Alex Post

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