A credit score is a number that is generated by a mathematical formula based on information that is in your credit report, compared to the information of other people. The resulting number is a highly accurate prediction of how likely you are to pay your bills.
Credit scores are used extensively and if you’ve gotten a mortgage, a car loan, a credit card or auto insurance, the rate you received was directly related to your credit score. The higher the number, the better you look to lenders. People with the highest scores get the lowest interest rates.
The scale runs from 300 to 850. The vast majority of people will have scores between 600 and 800. A score of 720 or higher get you the most favorable interest rates on a mortgage.
The Key Factors that Determine Your Score
- Paying your Bills
The most important factor is how you’ve paid your bills in the past, placing the most emphasis on recent activity. Paying all your bills on time is good, paying them late on a steady basis is bad. Having accounts that were sent to collections is worse. Declaring bankruptcy is worst.
- Amount of money you owe and the amount of available credit
The second most important area is your outstanding debt which means how much money you owe on credit cards, car loans, mortgages, home equity lines, etc. Also considered is the amount of credit you have available. If you hold possession of 15 credit cards that have a $10,000 credit limit, that’s $150,000 of available credit. People who have a lot of credit available tend to use it, which makes them a less attractive credit risk.
- Length of credit risk
The third of factor is the length of your credit history. The longer you’ve had credit, the more points you get.
- Mix of credit
The best scores will have a mix of both revolving credit, such as credit cards, and installment credits such as mortgages and car loans.
- New credit applications
The final category is your interest in new credit, how many credit applications you’re filling out. The model compensates for people who are rate shopping for the best mortgage or car loan rates. The only time shopping hurts your score, is when you have previous recent credit stumbles, such as late payments or bills sent to collections