A person's credit score is extremely important, as it determines his or her eligibility for all kinds of financial endeavors, such as credit cards and home loans. Some people have difficulty adjusting their scores because they are not sure what the number is based on. A specific formula is used to determine the score, and it's based on whether the person pays bills on time, how much debt he or she has, the length of his or her credit history, how many new accounts the person has, and the diversity of the credit accounts. Knowing what criteria go into the number on a credit report can help a person maintain a good score and qualify for higher limits and better rates on loans.
A credit score may be anywhere from 300 to 850, with 300 being the most risky and 850 the most secure in the eyes of lenders. Therefore, a higher number will qualify an applicant for a better loan rate. A person with a number under 500 is unlikely to be able to secure any type of loan.
The Fair Isaac Corporation, or FICO, which determines credit scores, uses a specific formula to come up with the number. Being aware of this formula can help people keep an eye on their credit. The most important factor is whether or not the person pays his bills on time, which accounts for 35% of the score. The longer a person pays his minimum balance on time for each credit card or loan that he has, the higher his credit score will be. Since this factor accounts for the largest portion of the number, it should be people's main priority.
The difference between a person's total credit limit and total amount owed is the next most important factor, making up for 30% of the total. The less credit a person uses out of the amount he has available, the better he will look to the credit bureaus. Financial experts often recommend that people do not charge more than 50% of the limit on each of their credit cards.
The length of a person's credit history accounts for 15% of his credit score. For this reason, cancelling credit cards can lower the number. People who do not want to use a card anymore may do better by cutting it up without canceling the account. If a monthly or annual fee is charged to keep the account open, however, canceling may be the better option.
The remaining 20% of a credit score is equally divided between new accounts and applications for credit and the diversity of credit types the person has. Too many new accounts and applications at one time result in a lower number, while more diversity of credit types makes for a better score. A mix of credit cards, retail cards, and loans that are paid in regular installments will help boost the last 10% of the score.
