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Credit Education > Credit Score > Your Credit Score De-Mystified

Your Credit Score De-Mystified

By Janet Lacey
Published: Saturday, October 10th, 2009

The credit score in today’s world is a magical number; it has the power of opening doors to unlimited money in the form of no limit credit cards, high value mortgages and loans. At the same time, the same credit score can leave you with a list of rejections from almost each and every creditor in the country. What exactly is this mystical, all powerful credit score and what is it made of?

What Is A Credit Score?

A credit score is a 3 digit number ranging from 300 to 900. Your credit score helps lenders in deciding whether you are a good credit bet or not since it is based upon a number of variables from your personal credit history.

How Is Credit Score Calculated?

Different agencies use a number of different algorithms to calculate your credit score based upon your credit history. The most common algorithm used is the Fair Isaac Corporation algorithm, which provides you with what is known as your FICO score. The FICO score is calculated by appointing weights to different components of your credit history and it is supposed to be a good indicator of whether an individual will default on his or her credit history or not.

What Is The FICO Score Made Up Of?

A FICO score is made up of five major components– Bill paying history, mix of credit, debt to available credit ratio, length of credit history and number of recent credit inquiries. Given below is the exact weightage given to each component and a list of the things that make up the component.

Payment History (Weight-35%): This is the most important component of your credit score because your lenders are most concerned about whether you will pay your bills or not and if you will pay them on time. Your payment history is affected by the late pays that you have made, collections, charge offs, delinquencies and bankruptcies.

Debt to Credit Ratio (Weight-30%): Your debt to credit ratio is calculated by comparing the amount of debt that you have with your total credit limit. This is also known as your credit utilization ratio. The higher your credit utilization ratio, the lower will be your credit score. So if you are maxing out your credit cards, your score will not be as good as it will be if you only used less than 40% of your limit.

Length of Credit History (Weight-15%): The longer your credit history, the better is the picture that your lenders will get about your credit habits. So a long credit history will get you a higher credit score, of course providing for the fact that your payment history is not marked by delinquencies and collections.

Inquiries (Weight-10%): Inquiries are made by lenders every time you apply for some kind of credit. Too many inquiries show that you need more credit because of financial troubles or because you are unable to manage on your current mix of credit and income. So the lower the number of inquiries, the better will be your credit score.

Credit Mix (Weight-10%): If you have the ability to manage different types of credit well—credit cards, mortgages, car loans etcetera, then it is a favorable addition to your credit score.

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