How credit scores work
Consumers from all walks of life stress out about one thing -- credit scores, and with good reason. Whether it's a college education or a beach house to retire in, one little number will determine whether you can finance your dreams. The first step to keeping your credit high is understanding how it works.
What it isCredit scores are numbers that represent the likelihood of the consumer becoming seriously delinquent within the next 24 months. Credit scores help lenders determine interest rates and repayment terms for loans. Many factors contribute to a credit score. The range of scores and weight given to particular factors depends on the scoring model used. For example, FICO scores, which are commonly used by lenders, range from 300 to 850 where higher scores indicate lower credit risk. Here are the three main factors that contribute to your FICO score:
Payment historyThe largest chunk of your credit score, 35 percent, is determined by how reliably you pay your bills.
Your payment history includes any unpaid or late bills, delinquencies and public debt records.
Debt to credit limit ratioHow much you owe in comparison to your total credit limit makes up 30 percent of your score. To keep your score high, experts recommend that you maintain credit card balances of less than 30 percent of your credit limit.
Credit historyThe length of your credit history makes up 15 percent of your score. Consumers with the best credit scores have had their cards for a while. Credit history shows that you can keep an account in good standing throughout the years. To maintain strong credit history, consumers thinking about ditching one of their credit cards should start with the newest one.
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