What is a Credit Score?

The majority of people understand the basics, like how failing to make a payment will cause your score to go down, but there are a number of complexities that trip up the average consumer. If you pay your debts on time, don’t carry too much debt on any one card, don’t close older accounts unless absolutely necessary and only apply for new credit when you have to you will generally be in good shape. However, it is important to keep yourself informed so you can maintain a healthy credit score that accurately reflects your consumer status. ​

What makes up a credit score?

Your credit score is generated by a mathematical algorithm using information in your credit report. The three corporations, called "credit bureaus" specialize in collecting and reporting on financial history. Those three companies are Experian, Equifax, and TransUnion. It's designed to predict risk, specifically, the likelihood if you will be delinquent on your credit obligations. There are a multitude of credit scoring models in existence, but there's one model that dominates the market -- FICO (Fair Isaac Corporation) credit score. According to myFICO.com, the consumer website for the FICO score developer, "90 percent of all financial institutions in the U.S. use FICO scores in their decision-making process."

Payment history:

  • Data from your credit report goes into five major categories that make up a credit score. The scoring model weighs some factors more heavily, such as payment history and debt owed.
  • Payment history: (35%) - Your account payment information, including any delinquencies and public records.
  • Amounts owed: (30%) - How much you owe on your accounts. The amount of available credit you're using on revolving accounts is heavily weighted.
  • Length of credit history: (15%) - The length of time the accounts have been opened and if there is any recent activity.
  • Types of credit used: (10%) - The mix of accounts you have, such as revolving and installment.
  • New credit: (10%) - Your pursuit of new credit, including credit inquiries and number of recently opened accounts.

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