Quick Facts about Credit Scores

Most Americans have a general idea of what their credit or FICO score is.  At the very least they know if it’s good, bad, or just so-so because at some point they’ve had to use that score to obtain some type of financing.  But there are some misconceptions about a credit score that can cause confusion.

The Fair Isaac Corporation (FICO) is who determines your credit score based on a formula that takes many different factors into account.   FICO scores are calculated from the credit data on your credit report.

Your credit score is not just simply, you have a credit, you pay on time and that automatically equals a good or high score.  It’s not that simple.  The actual formula that is used by the Fair Isaac Corporation is a secret but these are the five (5) main factors that affect your score.

1. Payment history (late, on time, etc.) – 35%
2. Amounts owed (especially in relation to the credit line) – 30%
3. Length of credit history (how long have you had credit) – 15%
4. New credit (how many new cards do you have) – 10%
5. Types of credit used (bank cards, department stores, etc.) – 10%

All of these can either negatively or positively impact credit score which can come to a surprise to someone who makes all their payments on time but didn’t realize that because they are maxed out on most of their cards and have opened several new accounts, their score is not as high as they thought.  Even things like other credit companies inquiring into your credit can lower your score.

Having a decent credit score (at least 620) is very important when you are going to apply for any type of major financing like a home loan or car loan.  The higher score translates directly into a more favorable interest rate.  Typically 720 and above will get you the best or most favorable rates available.  However, tough economic times can wreak havoc on your scores and your financial situation.  If this is the case, you may need to speak with a financial expert to re-evaluate your situation and make some changes that will help increase your credit in the long run.  The consultants at First Rate are credit experts and can help you determine what you need to do to maximize your credit score.