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Credit Report & Credit Score; Credit Repair, Debt Management > Credit Score > What is a Credit Score and How Does It Influence Your Borrowing?

What is a Credit Score and How Does It Influence Your Borrowing?

By Ruth Racey
Published: Tuesday, September 18th, 2012

Compilation of the credit report and arrival at the credit score is a complicated process. Normally, around 35% of the credit score is derived from your past borrowing history. If you have been prompt in your repayments, your credit score would increase automatically. On the other hand, delayed payments and defaults would result in reduction of the credit score proportionately. About 30% of the credit score is determined by the extent of your total borrowing. If your credit utilization ratio is very high, your credit score would come down. When you clear existing debts, your credit score would move up again. Another 15% of the credit score is computed from your credit history over several years in the past, taking into consideration the promptness of repayments. Around 10% of the credit score is based on the types of credits you have availed. The final 10% is decided by your recent credit records or your recent efforts for obtaining credit.

The FICO credit score of Fair Isaac Corporation normally ranges between 300 and 850. The VantageScore computed jointly by the three credit reporting agencies, namely, Equifax, TransUnion, and Experian varies between 501 and 990. They assign the letters A to F to denote specific credit score ranges. FICO is the most popular and widely used credit score in the United States. The lenders take a careful look at your credit score and your credit reports when you approach them for a loan or even for getting a credit card.

It is nearly impossible to obtain the highest FICO credit score of 850. However, lenders normally consider credit scores above 720 as a good credit. If your credit score is above 720, you would get very good terms and lower interest rates when you borrow. Lenders consider you as an individual with least credit risk. If your score is between 600 and 720, they rate you as medium credit risk. They would still lend you money that you ask but the terms would be tougher and the interest rates would definitely be higher. If your credit score is below 600, it is very unlikely that you would be able to obtain any credit.

Still, it is not a difficult task to improve your credit score within a few months or a year. If you clear your high interest rate borrowings like credit card loans, your overall borrowing would come down and your low interest credits would work in your favor in increasing your credit score. You should also become prompt in your repayments if you have been delaying or defaulting on them until now. This would also help in increasing your credit score. If you pay around $10 to the three credit rating agencies, you would be able to get your credit report and credit score. You should do this at regular intervals so that you know when your credit rating drops below 700. This would enable you to take necessary action to improve your credit score.

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