How Credit Scores are Determined

If you have ever taken the time to read over your credit score

, you've probably wondered, "How do these companies figure my credit score?" Lots of others probably wonder the same thing. How do those credit reporting companies figure out that three-digit number?

Credit scores range from 300 to 850, with 850 being the best possible score you can achieve. Credit companies use this score to make a quick decision on whether or not to accept an application for a credit card, loan, mortgage, etc. It keeps them from having to go through your entire credit report.

The most common version of credit score is the FICO, named after its developer, the Fair Isaac Company. This number is what most lenders consider when making their decision on whether to approve you.

There are some parts of your credit history that are weighed more heavily than others. The biggest factor is whether or not you pay your bills. If you have a slew of late payments or collections on your credit report, your score will obviously be lower. Past due accounts from five years ago won't hurt your score as much as ones from the past year or two.

Credit utilization is also taken into account when figuring your credit score. This is the amount of debt you have accrued compared to the amount of credit you have been extended. The higher your balances, the lower your credit score. The recommendation is to keep your balances no higher than about 30 percent of your credit limit.

The length of your credit history also plays a big factor here. It shows a history of good or bad tendencies when it comes to credit. This is one of the reasons that younger people tend to have lower credit scores. Leave accounts open that you've had for a long time, especially if you have remained in good standing with them.

Too many credit inquiries can lead you to take a hit on your credit score. Some people think this is a myth, but it's true. If you have applied for a lot of credit, it shows that you are probably experiencing financial stress or are possibly living outside your means. Simply checking your report for personal informational purposes, however, won't hurt your score.

Knowing what factors affect your credit score can help you keep a healthy score. Practice healthy spending habits, pay your bills on time, and establish a good history, and you shouldn't have a problem. Make sure to check your report from time to time to ensure you haven't fallen victim to identity theft.

How Credit Scores are Determined

By: Buttom Bunner

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