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Deciphering Our Credit Score

By Karen Anderson
Published: Sunday, November 15th, 2009

We often read about the importance of our credit scores in credit report tips. Apparently, this three-digit number is one of the most important indicator of our creditworthiness. Whenever we apply for credit, lenders and other financial institutions primarily base their decisions on our credit score. It is therefore a misconception to think that  it is our age, race, gender or even income that primarily determines if we are to be granted credit. Thus, the more we know about our credit score, then the more edge we have.

The most commonly used score is the FICO score. It is used by the three main credit bureaus and is sometimes called a Beacon or Empirica score. The score derives it name from its developers: the Fair, Issac and Company. The scores range from 300 to 850 wherein the latter indicates a good credit standing.  Although, there is no perfect credit score, a score of at least 620 is sufficient to warrant us an approval for our loan or credit applications. Credit report tips however would always mention that the higher the FICO score, the better.

What are the factors considered in the computation of our FICO score? Perhaps the most important of all the indicators is our payment history. It accounts for 35 percent or more than a third of our credit score. Accordingly, punctual and consistent payment behavior will do wonders for our credit score. In fact, one of the most common credit report tips is to pay on time. On the other hand, consistently paying late would decrease our credit score. Needless to say, bankruptcies, judgments, and collection accounts should be avoided as much as possible.

Our debts and liabilities account for 30 percent of our score. The more debts we have, the lower our score would be. Having high balances relative to the credit limit is another thing that we should avoid. The length of our credit history on the other hand makes up 15 percent of our score. The general rule in credit report tips is that the longer our history with an account (two years of more), the better. It is therefore important that we don’t close our old accounts for they garner more points than the newer accounts we have.

New credit accounts and inquiries make up 10 percent of our score. Accordingly, mortgage and auto loan inquires that were made within a two-week period is considered as a single instance. This is in order to facilitate scoring purposes.

The type of credit we used accounts for 10 percent as well. The general advice proposed in many credit report tips is to use a variety of credit instruments. This means not limiting ourselves to credit cards but also tapping retail accounts, mortgages or installment loans among others. This shows our creditors that we are able to handle each type of debt prudently. 

By taking into account these factors, we are better able to improve our credit score and consequently, widen our financial opportunities.

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