Like it or not, yourcredit scoreis an important number.
It often dictates what you’re free to and cant afford to purchase.
Youre probably already aware that credit scores exist, but do you know how they are calculated?
Do you know what your credit score is?
Dont bury your head in the sand.
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What Is a Credit Score?
Your credit score is a three-digit number designed to represent your credit risk to potential lenders.
Credit scores range from 300 to 850.
Low or poor credit scoresmake it harder for you to get a loan or credit card.
If you do get either, your interest rate will probably be high.
Your credit score is based on information inside your credit report.
Instead, different companies use their own credit scoring systems to calculate your score.
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What Is a Credit Scoring Model?
Your credit score can vary depending on the credit scoring model used to calculate it.
Insurance credit scores can affect your insurance premiums.
But you cant control which credit score model is used when you apply for a new card or loan.
Understanding FICO Credit Scores
Your FICO credit score consists of a number ranging from 300 to 850.
The higher you could get your number, the better.
What Goes Into Calculating Your FICO Score?
Your FICO credit score is calculated using five main factors.
Each factor carries a certain weight, with some more important than others to your overall score.
Payment History
When calculating your credit score, FICO looks at yourpayment history.
Payment history accounts for 35% of your credit score.
Credit Utilization
Just because you have available credit doesnt mean you should max out your credit cards.
Keeping your credit utilization rate at or under 30% is good.
Under 10% is ideal.
Credit utilization accounts for 30% of your credit score.
Length of Credit History
The length of your credit history shows how youve borrowed over time.
Credit history accounts for 15% of your credit score.
New Credit
New credit can be good or bad for your score.
But opening a new credit card occasionally can actually help boost your score.
Thats because adding a new card and keeping a low balance can lower your overall credit utilization.
New credit accounts for 10% of your credit score.
Credit Mix
Its good to have a mix of credit to your name.
Credit mix accounts for 10% of your credit score.
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What Makes Up VantageScore Credit Scores?
Like your FICO score, your VantageScore can range from 300 to 850.
And while FICO is more widely used, free credit checking companies like Credit Karma often use VantageScore.
Why Are Credit Scores Important?
Start with high-balance credit cards and make a run at get them at or below 30%.
Dont Be Afraid to Check
Its a myth that checking your credit score lowers it.
In the world of credit, there are two types of inquiries:hard and soft.
Many financial institutions and credit card issuers offer free credit checks to customers.
you’re able to also get afree credit reportfrom each of the three bureaus once every week atAnnualCreditReport.com.
Your credit score is important if you want to borrow money without incurring high fees or interest rates.
Heard of These Credit Card Debt Tips?
But millions of Americans overlookthese easy tipsthat could help them manage credit card debt even more wisely.
Read moreto boost your credit knowledge and keep your credit score in check.
Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder.
