Understanding your credit score is vital

A credit score is a credit rating that represents an individual's current creditworthiness as calculated by a statistical model. A credit score attempts to assess the chances of a prospective borrower failing to repay a loan over a specified period of time. A credit score is usually based on the information in an individual's credit report.

Banks, credit card companies and lenders use credit scores to manage consumer risk. Credit scores help to determine who qualifies for a loan, assigning an interest rate, assigning credit limits, and managing accounts that are already open (for example, treatment of accounts that are in default). FICO is the most known score, however there are many others, including NextGen and Vantage.

Credit Analysis tools are available to improve your credit score, and help you plan for the future. 

Why Improve Your Credit Score?

People with high credit scores are typically regarded as being the most credit-worthy by the banks and lending institutions. As a result of their good credit-worthiness, they have lower interest rates, which saves a large amount of money, and find it easier to obtain loans (for a new house, a new car, and more). Understanding the reasons for credit scores to go up or down is fundamental to earning better credit.

How credit scores are calculated

Payment history is the most important part of the credit score. About 35% of the score is based on your previous record of paying bills. The credit score is affected by late payments and the number sent out for collection.

Existing debt is the second largest indicator of credit score. About 30% of the score is based on the amount of outstanding payments on your home and car, credit cards, and other debts. Credit cards and lines of credit should preferably be at 25% or less of their total limits. Over 25% starts to lower your credit score.

Length of credit history accounts for 15% of the credit score, based on the amount of time you've had loans, credit cards, and other types of credit. Lenders and banks can more easily assess credit-worthiness with a longer payment history. Historical payment trends are used to estimate your ability to make payments in the future.

Type of credit represents 10% of the credit score, based on the number of loans, credit cards and types of credit you have listed in your Credit Report. The correct balance is important. Having too little or too many can reduce your credit score.

Number of inquiries on the credit score concerns the remaining 10% of your credit score. Your applications to financial institutions for credit cards, department store cards and loans, will generate inquiries when these finance companies check your credit report. Your credit score is reduced as they indicate additional debt and possible financial difficulties. The latest inquiries have the greatest affect on your credit score.