Making Sense of Your Credit Score

Your credit is one of the most important financial assets you possess. Your credit score, in one tidy number, summarizes your credit. So, you’ll want to know the three major factors that impact it to know what potential lenders think when they are deciding whether or not to extend you credit:

  • Credit Report
  • Credit Score Factors
  • Breakdown of Credit Scores

Credit Report

Since you initiated credit in your life, all of your credit activity has been reported to three different credit bureaus (Equifax, TransUnion, Experian). That information in turn gets compiled into a credit report (It’s so important you are entitled to one free credit report each year).

Your credit report contains the following information:

Personal: Name, addresses, social security number, places of employment and birth date

Credit History- Activity on all of your loans, credit cards, mortgages, and any other outstanding debt. Payment amounts, credit limits, amount owed and payment history are detailed in this important section.

Inquiries- When a potential creditor requests to review your credit report, it’s noted for one year.

Public Record- Overdue taxes, liens, bankruptcies, legal judgments, lawsuits and child support information

Credit Score Factors

The elements and the weight each is given when calculating your credit score are:

  • Number of Credit Inquiries (10%)
  • Type of Credit (10%)
  • Length Credit History (15%)
  • Debt Ratio (30%)
  • Payment History and Credit Utilization (35%)

Breakdown of Credit Scores

FICO, one of the most common credit scoring systems, is an acronym for the Fair Isaac Corporation. They developed this particular scoring system.  The FICO credit score is a number between 300 and 850. Here is a rough breakdown of the scoring ranges and what they mean:

300- 549- People in this range will not qualify for most loans unless the loan is co-signed or secured with collateral.

550-639- People in this bracket are classified as sub-prime risks. They could obtain limited credit for auto loans or credit cards. They will not receive the best interest rates. A home loan might be very tough to get.

640- 719- These individuals are good, solid credit risks. They will be able to get mortgages, personal loans, auto loans and most credit cards.

720 to 850- These people are the most credit worthy members of society and will qualify for almost any loan. They will receive the most favorable loan terms including the best interest rates.

These ranges are not absolute. However, this breakdown of credit scores is a reliable gauge of how lenders look at the credit background and activity of potential borrowers.