What is a credit score?
When you apply for a credit - whether it's an auto loan, a credit
card, a mortgage or a personal loan, lenders want to know how worthy
or risky you are as a borrower. A credit scrore is a number lenders
use to help them predict how you likely you are to make payments
on time. A score is an estimate of your credit risk based on a snapshot
of your credit report at a particular point in time. The higher
your score, the lower the risk to lenders.
Your credit score plays a vital role in getting you better deals
particularly in terms of loans and interest rates that lenders offer
you. Understanding your credit score can help you in making decisions
that can lower your credit risk and raise your credit score over
time.
What is FICO score?
A FICO score is a credit score developed by Fair
Isaac & Co. Credit scoring is a method of determining
the likelihood that credit users will make credit payments
on time.
Advantages:
- Getting loan is easier and faster.
- Credit decisions are fairer.
- Less credit "mistakes".
- More credit is available.
- Overall low credit rates.
Disadvantages:
- If low slightly high interest rates.
- Terms may not be as favorable.
- Possible low credit limits for low FICO scores.
Understanding Your FICO Credit Scores
As a rule, credit scores analyze the credit-related information
on your credit report. How they do this varies. Since FICO
scores are frequently used, here is how these scores assess
what is on your credit report.
- Your payment history-about 35% of a FICO score
Have you paid your credit accounts on time? Late payments,
bankruptcies and other negative items can hurt your credit
score. But a solid record of on-time payments helps your
score.
- How much you owe-about 30% of a FICO score
FICO scores look atthe amounts you owe on all your accounts,
the number of accounts with balances, and how much of your
available credit you are using. The more you owe compared
to yourcredit limit, the lower your score will be.
- Length of credit history-about 15% of a FICO score
A longer credit history will increase your score. However,
you can get a high score with a short credit history if
the rest of your credit report shows responsible credit
management.
- New credit-about 10% of a FICO score
If you have recently applied for or opened new credit accounts,
your credit score will weigh this fact against the rest
of your credit history. FICO scores distinguish between
a search for a single loan and a search for many new credit
lines, in part by the length of time over which inquiries
occur. If you need a loan, do your rate shopping within
a focused period oftime, such as 30 days, to avoid lowering
your FICO score.
- Other factors-about
10% of a FICO score Several minor factors also can influence
your score. For example, having a mix of credit types on
your credit report-credit cards, installment loans such
as a mortg'age or auto loan, and personal lines of credit-is
normal for people with longer credit histories and can add
slightly to their scores.
