How To Understand The Credit Score Breakdown Basics
Below is a MRR and PLR article in category Master Series -> subcategory Personal Finance.
Understanding the Basics of Credit Score Breakdown
Many people realize the significance of their credit score, but understanding the breakdown can be challenging. While various scoring models exist, most lenders rely on the FICO method, developed by the Fair Isaac Corporation in the 1980s. The three major credit bureaus?"TransUnion, Experian, and Equifax?"collaborated with Fair Isaac to create this system.
Your credit score ranges from 300 to 850, with the average American scoring around 690. While a score like this can secure a loan, it may not qualify you for the best interest rates.
Here's a breakdown of what impacts your credit score:
1. Payment History (35%)
This is the largest factor affecting your score. It includes whether you pay bills on time, and accounts sent to collections, bankruptcies, and tax liens. Missing a payment is more damaging than being late, and mortgage payment issues are more severe than missing credit card or utility payments.
2. Outstanding Debt (30%)
This reflects the amount of debt you have compared to your available credit. Avoid maxing out credit cards; instead, use 25% to 50% of your available credit. To manage this, consider obtaining additional credit lines without heavily using them. However, avoid applying for many credit cards at once, as this can harm your score. If your credit is good, apply for a reputable card every six months for emergencies.
3. Credit History Length (15%)
How long you've maintained credit is also important. The longer your credit history, the better your score, as it provides more data for assessing future creditworthiness.
4. Types of Credit (10%)
Having a mix of credit types, like loans and credit cards, can boost your score if managed well.
5. Credit Activity (10%)
Opening several new accounts at once can temporarily lower your score. Be cautious of "hard inquiries," which occur when you've authorized a lender to check your credit. Checking your own score doesn't affect it.
Understanding these components is the first step toward improving your credit score. By managing these areas effectively, you can enhance your financial health.
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