What is a Credit Score?
Credit score refers to the FICO score, which is created and calculated by the Fair Isaac and is a measure of an individual's creditworthiness. It is a mathematical summary of the information on a person's credit report. that it is not the same as a credit report; rather, a credit score is based on information in a credit report.
How Does a Credit Score Work?
Credit scores range from 300 to 850. The higher a person's score, the more creditworthy he is. According to Fair Isaac, the medianis 723. The best rates tend to go to borrowers with FICO scores above 740, but this is a generalization. The FICO-score algorithm considers several things.
- Payment history accounts for 35% of the score. This includes whether the person has made late payments, how late those payments were, the number of past-due payments, the number of accounts paid on time and similar factors.
- Amounts owed accounts for 30% of the score. This includes how much the person owes on his various accounts, the number of accounts with balances, the amount of available credit that the person is using, the proportion of balances to his original loan amount and similar factors.
- The length of the person's credit history accounts for 15% of the score.
- The amount of new credit accounts for 10% of the score. It includes the number of recently opened accounts, the number of recent credit inquiries, the time since the person opened an account, the timing of the last negative activity (such as a late payment) and similar factors.
- The types of credit used accounts for 10% of the score.
The weightings may be different for people who have not been using credit a long time.
It is important to debt and employment history are also not factored in. Credit scores also do not reflect participation in credit counseling.that credit scores are based only on credit reports from the three major credit bureaus (Experian, TransUnion and Equifax), so it is possible for a person to have three different credit scores. In accordance with the Equal Credit Opportunity Act, Fair Isaac does not consider age, race, color, religion, national origin, gender or marital status when calculating a . Salary, job title, employer, where the borrower lives, interest rates on the borrower's other
Credit scores are not free, although in many cases lenders pay for and then disclose the scores to borrowers when they apply for credit.
Why Does a Credit Score Matter?
The credit score is perhaps the most widely used and widely recognized measure of creditworthiness. They tremendously affect the amount of loan for which a person with a higher score would only have to pay 6%. Thus, when it comes to mortgages, car loans and other large borrowings, a good score can save a person thousands of dollars.a person qualifies for and the interest rate he or she pays for that . A person with a low score, for example, might have to pay 10% on a
However, income, employment history and character (three things not reflected in a score) when making these decisions. Nonetheless, scores give a fast summary of a person's creditworthiness. They also streamline and equalize the lending process, create less paperwork for the borrower, facilitate faster lending processes and lower lending costs.scores are not the only factor that consider when deciding whether to extend to a person. In particular, also look at a person's
Many people try to predict what mortgage payment. Ultimately, however, improving a score generally centers on a few concepts: paying bills on time, getting current and staying current on bills, keeping credit card balances low, avoiding unnecessary , avoiding opening a of new accounts at a young age, checking one's for mistakes and judiciously using accounts.happen to their scores if they do or do not take certain actions. The algorithm that calculates the score is both complicated and proprietary, meaning that it is hard to say exactly what a person's score be if she, say, is late on a
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
Mutual funds are one of the great success stories in the history of financial services. In 1970, just 360 funds existed in the United States, with assets under...Read More →
From mobsters to fraud to ridiculous levels of leverage, these corporate meltdowns were not your run...Read More →
Homeowners across the country are getting squeezed by their homeowners insurance premiums. That's because in an attempt to stop their financial bloodletting, home insurance companies are looking...Read More →