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What Your Credit Score Really Means

By Ruth Racey
Published: Wednesday, November 4th, 2009

Some people have the notion that their credit score depends on their credit card purchases or on the number of cards they own.  The truth is that your score is the evaluation of your credit worthiness in numbers.  This three-digit number is not just about how much you spend or how many cards you have you have in your wallet.  More importantly, the score is about how well you manage your accounts.

The three major credit bureaus namely Experian, TransUnion and Equifax use their own scoring models to calculate consumer credit scores.  Experian makes use of the FICO scoring system which is based upon 5 categories.

The 5 categories include your payment history, credit-to-debt percentage, length of credit history, types of debts, and credit report inquires.  Using the FICO scoring system, a person can acquire a low or high score, depending on how he or she fares on each factor.  Of these 5 factors, payment history (35%) and credit-to-debt ratio (30%) makes up the largest percentage of the total score or rating.  Nevertheless, the remaining 3 factors also play a significant value in your final rating.

Lending companies, credit card issuers, banks and insurance companies will check the score or report when reviewing your application.  Needless to say, a higher score can easily win the approval of a lender since the financial report shows that you have been able to handle your debts in a responsible way.

Obviously, building a good score is more than just having several cards in your name.  What matters most is how you use each of your credit cards to build a good score.  If you try to keep your balances lower than the credit card limit and if you make it a point to submit your payments on time, then you should be able to maintain a good score.

However, in order to build an impressive rating, you should not limit yourself only to credit card accounts.  You can show your flexibility in managing your finances by obtaining different types of credit.  What types of credit, you may ask? 

For instance, aside from owning credit cards, you can apply for a personal loan or a car loan.  If finances permit you to do so, you may consider applying for a home loan or mortgage as well.  Nevertheless, do not apply for loans in the hope that it will instantly raise your score or rating.  To keep your finance history in good shape, make sure that you will be able to keep up with loan payments.

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