Car loans, bank loans, mortgages, opening a new credit card — they all hinge on your credit score, a number that at its core, represents your ability to repay a loan. Your credit score can make or break the loan process.
Table of Contents
The Credit Score Calculation
Here’s a general breakdown of what affects your credit score in the FICO model:
- 35%: Payment history – How have you paid back your lines of credit?
- 30%: The amount you owe on credit and your total debt
- 15%: Average ages of your credit history
- 10%: New credit
- 10%: The types of credit utilized
It’s important to note that the score reported from each bureau is unlikely to be exactly the same. For example, while Experian and Equifax each weigh payment history as 35 percent of your score, TransUnion weighs it at 40 percent.
FICO, VantageScore, and Alternative Credit Score Models
The history of credit dates back to the 1820s, but modern credit scores were not solidified until the Fair Credit Reporting Act, the result of a 1970 Congressional inquiry. In 1989, Fair, Isaac, and Co. cemented their standard calculation, also known as the FICO score, as the standard.
But, in 2006, a challenger appeared. VantageScore was introduced, and has different weights to how your score is calculated. TransUnion uses a calculation closer to VantageScore, while Experian and Equifax use a more traditional FICO-like calculation.
Both scores are occasionally updated, though lenders tend to be slow in actually implementing updates.
Why Your Credit Score Matters
The average credit score in 2015 was 695. This falls in the average to fair category. Ideally, you want your credit score to be above 720 – where lenders will give good deals to those with excellent credit, such as lower interest rates. Experian has a breakdown of the different categories of credit, noting that in 2015, about 61 percent of Americans had a score of 579 or lower – poor credit and unlikely to be approved for credit.
How to Check Your Credit Score
You can check your credit report for free with each bureau once per year. The best way to do this is through AnnualCreditReport.com, which is the sole site authorized by the government to pull all three reports for free. While you can order a report through each bureau’s site, it may cost money. There are a number of services that will check your score monthly, for a subscription cost – TransUnion offers this, or instance – while others are one-time reports. Your score may also be available on a regular basis to you through your bank or credit card company. Your score usually updates about once a month, though it is also updated when new information is received. If you notice an error on your report, use one of our letter templates to dispute it with the bureaus.
Looking for more information on credit scores? Visit our Credit Score Resource Center.
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