There is no doubt about it the economy is in a spiral downturn. Many of us have been facing financial troubles daily; with all of the troubles leading to bad effects on our credit score.
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.
Many are confused by what a credit score is and how the number is determined. This article will help you understand how your credit score is derived.
There are 5 different things you need to look at which your credit score is based on. These include your payment history to lenders, how much you owe to these lenders, your depth of file, how many inquiries have dinged your report and what type of credit you have applied for or have now.
These five variables affect or weigh on your score differently. Payment history at 35 % and outstanding debt at 30% are the heavy hitters. While depth of file is at 15% and both Inquiries and types of credit are both at 10%, these together make up the total score when all are weighted together.
Now we are going to look at each category individually and what it consists of.
The first category we will discuss is your payment history. It is the biggest factor in determining your credit worthiness. It weighs in at 35% of your total score and tells whether or not you can and do pay your bills when you are supposed to. If you paid on time, they say so. If you are more than 30 days late they tell that also.
Weighing in at 30% on your credit report is outstanding debt. This category shows how much you have to still pay back on the monies you have already borrowed. To apply for more financing, this number should be kept in a range where it shows you can repay the money without any issues. To have a large amount of debt, could be your financial ruin.
The depth of file weighing at 15% simply looks at the time period of your credit history. Even if you dont want to use the credit card that you opened in 1986, you should keep the account active because the age of the account will reflect positively in your score.
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.
At 10% weight is the final category called types of credit. This categorizes the type of financing you presently have and have held in the past. Some can hurt your credit while others bolster it. An instalment loan is held in higher esteem than a loan from a financing company.
Knowledge of how your score is derived helps you to be master of your money and future!
