A credit score is a number generated by analyzing an individual’s credit report. This number is used to judge how worthy someone is to receive credit. It is also used to judge the amount of credit one receives and the interest rate. The company that creates these numbers is the Fair Isaac Company. This is why credit scores are often referred to FICO scores.
The exact calculation used to make a credit score are kept secret, but there are some indications of how a score is calculated. The biggest part of a credit score is the individual’s past history regarding making payments on time. This factor makes up 35% of the credit score. This makes paying bills on time a high priority in maintaining or establishing a good credit score. However, only payments that are more than thirty days late are factored into the punctuality part of the score. Almost equally important is how much debt the individual has. This is shown as a ratio of how much debt one currently has, such as a $300 debt on a credit card, in comparison to how large their credit line is. Another factor in a credit score is the length of time an individual has had credit. In general, the longer the credit history, the better the rating. These factors make up 30% and 15% of the credit score, respectively. The final 20% of a credit score is split equally between the types of credit used and the recent activity regarding your credit. While it is known that the blend of types of credit is a factor, it is not known what blend is considered good, and which is considered bad.
Lots of recent activity, such as many new accounts, reflects badly on a score. Finally, there are many
other things that can affect a credit score. These include bankruptcy, foreclosures, or a tax lien. Another factor is having a collections agency attempting to or previously attempting to collect a debt. Even a small amount paid more than thirty days late can cause an individual’s credit score to plummet. It is important to note that factors that may not influence a credit score or the issuing of credit include marital status, race, creed, and sex. Also, when an individual is denied credit because of their score, a valid reason must be given, specifically detailing why he or she was denied.
