OK, so you’ve decided that you’re going to buy a house, or a car, or a boat, or whatever it is that you can’t live without, and you need to know your credit score so you know what to expect in terms of financing. Good for you. You’re trying to be proactive, and you’re trying to avoid the surprise that can come when some creditor tells you that you’re more of a deadbeat than you thought. Knowing your credit score is a great place to start.
However, you need to know what you’re really looking at. Your credit score is a shorthand way of describing your credit worthiness. Lenders make decisions about you based on that number. It gives them a way to evaluate whether you’re a risk or not. It helps them figure out how much interest to charge you, and whether they’re going to give you any credit to begin with.
It’s useful to know what makes up your credit score. There are a few factors, each of which is weighted differently. It breaks down, roughly, like this:
- 35 percent of your credit score is your payment history. This is simply the record of whether you paid your debts on time, and how often you might have been late paying on those debts. This is the most significant factor in your credit score, accounting for more than a third of its value.
- The amount of debt you owe makes up another 30 percent of your credit score. Specifically, the credit reporting agencies look at the amount of debt you have versus the amount of available credit you have. Folks with the best credit scores will typically use only a small portion of the credit available to them.
- 15 percent of the score is related to the length of your credit history. The age of your accounts on your credit report matters. The longer you have open accounts, the more stable your credit history and the higher your score.
- The amount of your credit history contributes 10 percent. Having one credit card for 10 years isn’t as good as having 10 credit cards for 10 years. Again, there are other, more important factors, but this is one to be aware of, especially if you don’t have much credit history yet.
- The final 10 percent of your credit score has to do with your credit types. Too much revolving credit compared to secured debt will lower your overall credit score.
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