Your credit score is an important number that most people know very little about. Today, we're going to take a look at how it's calculated.
First, the basics. A FICO credit score used to assess your credit worthiness, ranges from 350-850. The higher the number, the better the score. There are 5 major components:
1) 35 percent of your score is devoted to your payment history. So pay your bills on time - even if you just pay the minimum payment. But, if you can pay the entire balance off, that's going to help you even more.
2) 30 percent of your score comes from the amount owed. Basically, don't have a 5,000 credit limit and keep a 4900 balance. You want to have a lot of available credit.
3) 15 percent is your length of credit history. Unfortunately, you can't do much about this one if you're just starting out. If you've got an account that's been open for a long time, as long as there's no annual fee, it's worth keeping it open.
4) Smaller percentages are paid to new credit and your mix of credit, such as do you have a mortgage AND credit cards?
5) It sounds obvious, but, to have a good credit score, you need to have and use credit. Even if you're very financially responsible and only pay cash for what you can afford, you look like a credit risk. So a little debt is a good thing.
When you get your free credit reports from places like annualcreditreport.com, you won't actually see your score. You have to pay for access.
Consumersunion.com, the group behind consumer reports, is looking to change that. They've launched a "I would love to know my score" campaign. As they point out, credit scores are important "to your financial future because they can determine if you can buy a home or the interest rates on your credit cards."
For now, sites like creditkarma.com give you an approximation of your score for free. Hopefully the real number will be available soon.
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