Everyone in the world today has been troubled by the current state of the economy. The troubles we face have had a bad impact on our credit score leading us to financial strain.
If you have ever applied for a loan for a home or a car, you know the single most important factor in your approval is your credit score.
What is a credit score really? How is the number determined? This is article will help you understand what is included in your credit score.
Your credit score is made up of 5 major categories. These include Payment history, Outstanding Debt, Depth of File, Inquires / New Credit and Types of Credit.
Each of the variables affect your score differently. Not all are equally looked at when deriving your credit worthiness. The payment history is what weights your score the most at 35% followed by outstanding debt at 30%. The other three have less of an impact and weigh in at 15% for depth of file and at 10% for both Inquiries for New Credit and for types of credit
Now we are going to look at each category individually and what it consists of.
Payment history needs no other explanation. It is the heaviest hitter at 35 % of your credit score. Basically it states if you pay your bills in a timely manner. A bill has a certain timeframe in which you are expected to remit payment, when you do so the creditor reports that. When you are delinquent by more than a month, this also is reported.
Outstanding debt ranks second in its effect at 30% on your credit report. Basically this tells how much you still owe the companies that lent money to you. In order to obtain new financing, this needs to be kept low in order to show that you can meet the repayment schedule. A large burden of debt can be your downfall.
Your depth file weight at 15% is affected by the amount of time you have held credit. The age of accounts affect your score. That credit card you opened in college, if left open and active, will boost your score up.
At 10% weights in both inquiries and types of credit against your score. The Inquiries of New Credit show who and how often your report has been looked at in order to extend credit to you, this is called a inquiry; the fewer inquiries against your report the better.
The final category of types of credit looks at the types of finances that you have taken out on credit. Some are classes to be bad compared to others. For example going for instalment loans is more preferred in comparison to a loan from a finance company.
By understanding what makes up a credit score, you can take control of your finances and secure your future!
