Understanding Your Credit Score

Credit card companies, home equity lenders, auto loan lenders and finance companies all use a model created by Fair, Isaac and Co, the San Rafael, California company that pioneered credit scoring 40 years ago and dominates the industry today.

A low score can raise the price of your loan and a very low score can mean denial of your loan completely.

Below you will find the percentages that determine your credit score.

  • Payment History (35%). The number one factor used when calculating your credit score is your payment history. For example, accounts that have gone to collections or charged off, bankruptcies or simple late payments on open accounts.  The more recent the problem, the more your score will be affected. 
  • Amounts Owed (30%). Have you maxed out your credit cards? High balances or balances that are close to your credit limit show financial irresponsibility and thus has a negative impact on your credit score. it is advisable to keep your balances below 30%. 
  • Length of Credit History (15%). Are all of your accounts brand new or have they been open for a while? The longer, the better. 
  • New Credit (10%). Every time you apply for credit of any kind, you create an inquiry on your credit report. A lot of inquiries negatively effect your score. 
  • Types of Credit in Use (10%). How many current loans from companies do you have and how much of them.  Is your credit too far extended, do you have a good variety of credit established, etc.  These all have impacts on your credit score.

Your score will range between 300 and 870 and, of course, the higher the better. As your score increases, your credit risk decreases. Exact numbers differ by lending institution but the average high approval score is 680 or above. Often times your score is taken from all three credit reporting companies and the middle score is used. 

Depending on the lending institution, your score can cost you. Some lenders will charge a higher interest rate if your score is below 600

A credit score of 680 or above can save you money, especially for home loans. If you are considering a significant loan you will want to be sure to check your credit reports first. If negative items appear on your report you have two choices. Live with it for 7 to 10 years or dispute these items.