What Is Your Credit Score?

What is Your Credit Score and Why it Matters - CreditReport.com

When it comes to your financial future, credit scores are as important as your social security number. Your three-digit credit score is a quick measurement of your creditworthiness. It is the first (and sometimes the only) factor lenders look at when deciding whether or not to grant you credit. So needless to say, if you want to secure a smooth financial future full of low interest rates, you should be aware of this important number.

What is Your Credit Score and the Principals Behind It

The basic principle behind these scores is: Credit Past + Credit Present predicts Credit Future. These scores are calculated based on the information in a credit report, including:

  • Payment history
  • Amount currently being used
  • Amount available
  • Length of history
  • Recent requests

These scores do not take into account gender, marital status, national origin, religion or race as factors.

The calculation of credit scores involves awarding points based on certain aspects of your report and then comparing that value to consumers with similar financial profiles. The score weighs some parts of your report more heavily than others. In general, payment history contributes to 35% of a score, amounts owed to 30%, length of credit history to 15%, and types of credit used and new credit each contribute to 10%.

Credit score: An elusive magical number

The original scoring model was developed in the 1950's. Since then, many other scoring models have been developed and dozens are in use today, with more on the way. Some creditors even use their own scoring models for different types of credit.

With so many scoring models in use, scores can ranges as broad as 150 to 930. "Good" scores obtained using one scoring model will generally reflect as a good score across all scoring models-but the actual number will be different. Scores alone are not as crucial as where the number falls on the scale.

Luckily, credit scores are not carved in stone. The value of your credit scores can fluctuate as your credit report changes, and sometimes it can change daily. Credit scores can also vary between the three national credit bureaus because different lenders report to different bureaus, so it’s a good idea for you to obtain a 3-in-1 credit report and score.

Although credit scores are important and a good gauge of your creditworthiness, low scores are not the end of your financial world. The best way to deal with less than stellar scores is to concentrate on good credit habits that will raise the number over time.

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