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Know what constitutes your credit score

By Sally Maison
Published: Wednesday, June 2nd, 2010

Credit score is the most important number in the personal finance world today. This number alone can get you approved for a new credit or a loan, or it can help the creditor reject your loan. The credit score is a simple number that is your entire credit history and your behaviour as a financial person put in a very concise and simple format.

Credit history contains details of all the credit you might have ever had and the transaction in each of these credits. The creditor can take a look at your credit history and see all the late payments you have ever made and take a decision regarding your credit application. The other option he has would be to look at your credit score, which is a small number but has equal amount of information. The important question would obviously be how what is the basis for the calculation of the credit score and what are the components of the credit score.

The credit score is calculated by a governmental agency known as FICO. FICO calculates credit scores based on data and information present in one’s credit report. There are many parts in the credit report and these parts are used in the credit score with different levels of importance being given to each such division. FICO considers five different divisions. These include payment history, amounts owed, length of credit history, any new credit and the type of credit used. The importance given to each of these sections will vary.

The payment history section will form the biggest chunk and will get thirty five percent of the importance while amounts owed will naturally be the second most important section. Amounts owed will be accountable for thirty percent of your score. Length of your credit history will also play a huge role and will account for fifteen percent of your credit score. Any new credits and the type of credit will account for ten percent of your score.

Payment history is the most important part of your credit report and naturally your credit score as well. As can be seen, it accounts for the greatest percentage. The payment history will contain all the payment details on all special accounts including credit cards, mortgages and loans. This is the part where are all the negative parts of a credit report will be present as well. This will include all the public reports such bankruptcy notifications, tax liens etc. The severity of late payments plays an important role and so does the amount of time for which an account has stayed unpaid. The mount due will also be considered.

Amounts owed are also an important part of your credit score account for thirty percent. It will consider the outstanding amount on special accounts such as credit cards, loans, mortgages. Length of the credit history is the time since when accounts have been open. This includes all kinds of accounts including credit cards and loans. Type of credits is the number of different types of credits you have had including loans, mortgages and credit cards. New credit is the number of accounts opened very recently and also the number of credit enquiries.

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