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What Your Credit Score Means

By Ruth Racey
Published: Sunday, October 4th, 2009

A credit score is a three digit number used to measure a person’s capacity in handling debts. Lending companies, credit card companies and insurance companies use their own scoring methods to gauge individual credit scores. Of all the scoring models used today, the FICO model by the Fair Isaac Company is the most widely-used and recognized in the industry. In fact, the FICO system is the one used by the three major credit reporting agencies in the US.

When applying for a loan or a card, you will be required to submit an application. Part of the reviewing process is the credit check which means your prospective creditor will check your credit report from any of the major credit bureaus (Experian, Equifax, TransUnion). Based on information contained in your report or chart, a prospective lender may choose to grant you approval or deny your application.

Clearly, a credit score is more than just a three digit figure. This number can either make or break your application for a new loan or a new card. For this reason, consumers need to be more conscious about how their personal scores are summed up and on what factors they are being scored in.

Thirty five percent of your final rating will depend on your payment history or performance in submitting payments. Needless to say, if you are always on time in paying bills, you should have no problem getting a perfect rating in this category. On the other hand, if you are usually late in paying bills, your final rating can really drop low.

Another thirty percent is based on your credit to debt ratio. To get a good score in this category, maintain small balances on your credit cards. Doing so is a good sign that you are a responsible borrower. To be on the safe side, it is advisable not to exceed 40% of your limit for each of your credit cards.

Fifteen percent is based on your credit history or the length of time you have possessed credit. This will go back to the time when you first opened an account. If you have had that first credit card since you were still in college, it shows that you have been building personal credit for a significant time, and that could earn you good points to add to your final score.

The last two factors, each comprises ten percent of your final credit score. These two factors include credit inquiries and the types of credit you have in your chart.

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