Checking Your Credit Score

What is a Credit Score and How Does it Really Work?

In today’s world credit plays an extremely significant role in the economy and in all of our lives. It improves living conditions and makes our lives much easier. When used responsibly, credit can also be a great asset. However, when you apply for credit whether it be it a mortgage loan, a car loan, or just a simple credit card application, banks or lenders would obviously want to know the risks that they have to take in approving your application. How else would they determine your credit risk? Through your credit score.

What is a Credit Score?

Your credit score plays a vital role whether you’ll be approved or denied for a loan and whether you’ll get a high or low interest rate. It’s a three digit numerical expression based on your credit file’s analysis. Your credit report from different credit bureaus (such as Experian, Equifax and TransUnion) will be analyzed and scored to predict the risk or the likelihood that you’ll default or fail to pay your credit obligations in the next 24 months.

Credit scores helps banks and lenders determine not just who qualifies for the loan at a specific interest rate, but also who is likely to bring in the most revenue. It also helps other businesses or organizations such as insurance companies, telecommunications companies, landlords and others to determine whether to deny or approve your application.

Your credit score represents your credit worthiness. This is like your proof whether you’ll be delinquent or not in your credit obligations. The total amount of your income doesn’t affect your credit score though, because what’s important here is whether you’re capable of paying your obligations or not, on time.

How Does It Work?

There are three ways in calculating your credit score, but one most widely used type of credit score is FICO. You’ll have three FICO scores (based on the information the three credit bureaus have on file about you) to be calculated which can range from 300 to 850 (the higher number means lower risk). These scores will determine whether your credit card or loan applications will be approved or denied, your total credit limit, and/or the total amount of loan you can borrow as well as its terms and interest rates.

To calculate your credit score, each of your FICO scores from the three credit bureaus should have at least one account which is open for at least six months and/or one account which has been updated for the past six months. This is to guarantee that your FICO score is based on your most recent credit report.

What’s in a Credit Score?

The information in your credit report is based on five major categories. This information makes up your credit score. The scoring will be based on some factors such as:

• Payment History – this is actually 35% of your total credit score; it includes all your payment information including any late payments or delinquencies made.

• Amounts Owed – 30% of your total credit score; this is the total amount you owe on your accounts or the amount of your available credit.

• Length of Credit History – 15% of your total credit score; the length of time you opened an account and the time since the account has been active.

• Types of Credit Used – 10% of your total credit score; this refers to revolving and installment accounts that you have been using.

• New Credit – 10% of your total credit score; these are the number of recently opened accounts, search for new accounts, and even credit inquiries.

Your age, marital status, race, income, and your employment history does not affect your credit score in any way.

Checking your Credit Score

It can really be frustrating if you’re being turned down for a loan. Especially when it’s because of your credit score. That’s why it actually pays to have an idea on what your credit score is so that you know your current credit status. Federal law requires consumer’s rights to get an annual free credit report from each credit bureau (but not an actual credit score, though) so you at least have an idea of what your score will be. You may use these reports to bring to a score provider or some reporting agencies to get the exact number of your credit score.