What You Need to Know About Credit Scores

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A credit score is a numerical representation of your credit history. It makes it easier for lenders to systematically make loan decisions. Credit scores are a reflection of how you’ve handled credit in the past and are used to determine your potential credit relationship in the future.

The exact information used by credit scoring providers (such as FICO) to calculate your credit score is a proprietary company secret but there is some publicly available information. For example, FICO has shared that 5 factors make up your credit score:

  • Payment History (35%) – the largest percentage because paying on time is important for lenders to know.
  • Amounts Owed (30%) – also known as capacity. It’s based on the amount of outstanding credit you have against your available credit limits.
  • Length of Credit History (15%) – how long you’ve had credit plays a role in your credit score. Longer credit histories are viewed positively. Adding new accounts can lower your overall credit history length.
  • Types of Credit in Use (10%) – this is based on the mixture of credit such as credit cards, personal loans, mortgages, auto loans, etc. A good variety is generally accepted as strengthening credit scores.
  • Account Inquiries (10%) – applying for credit impacts your credit score and having too many recent loan applications (or inquiries) can have a major negative impact. Apply for credit when absolutely necessary.

There are a variety of credit scoring systems such as VantageScore or the credit bureaus own scoring methods. The most widely used is the FICO credit score. Each credit bureau creates and offers their own credit score so it shouldn’t be confused with a FICO score.

Many financial institutions, credit card companies, and credit report monitoring tools may offer a free credit score. Some of these scores are FICO scores so consult with the company offering the free credit score on what scoring system is being used.