Understanding What Elements Make Up Your Credit Score

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[Path To Good Credit]

Knowing what factors make up your FICO Score is a great help toward understanding how your financial actions can impact your financial future. Knowing your score is critical to understanding your financial picture. However, it’s also important to understand how that score came about, how it’s calculated and what you might’ve done (or haven’t done) that has given you the score you have today.

Payment History – 35%: As you might expect, the repayment of past debt is a major factor in the calculation of credit scores. It helps determine future long-term payment behavior. Both revolving credit (credit cards) and installment loans (mortgage) are included in payment history calculations. Although installment loans take a bit more precedence over revolving credit. That’s why one of the best ways to improve or maintain a good score is to make consistent, on-time payments.

Amounts Owed – 30%: This category is basically credit utilization or the percentage of available credit being used/borrowed. Credit score formulas “see” borrowers who constantly reach or exceed their credit limit as a potential risk. That is why it’s a good idea to keep low credit card balances and not overextend your credit utilization ratio.

Length of Credit History – 15%: This factor is based on the length of time all credit accounts have been open. It also includes the timeframe since an account’s most recent transaction. Newer credit users could have a more difficult time achieving a high score than those who have a credit history. Since those with a longer credit history have more data on which to base their payment history.

Credit Mix – 10% : FICO Scores consider the combination of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. Credit mix is not a crucial factor in determining your FICO Score unless there’s very little other information from which to base a score.

New Credit – 10%: Today’s higher use of credit, factors into FICO Score calculations. Opening several new credit accounts in a short period of time can signify greater risk – especially for borrowers with a short credit history. So how one shops for credit and within what timeframe can affect a FICO Score in a number of ways. So now you know what elements make up credit scores. When looking over your accounts and scores, analyze them to make sure you are staying under the radar so that you may continue to maintain healthy credit scores!

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