It goes without saying that your credit score is the single most important factor of your financial life. Your credit score will determine whether you would be approved for a loan, credit card or line of credit. A credit score is nothing but a number calculated using a system developed by the Fair Isaac Corporation (FICO). Banks and lenders use this number to screen the potential customers, a higher score means the likelihood of customers paying on time is higher.
There are five factors that determine your credit score; these five factors are defined by FICO.
1) Your repayment history accounts for 35% of your credit score.
2) The amounts owed accounts for 30% of your credit score.
3) The duration of your credit history accounts for 15% of your credit score.
4) Applying for new credit, accounts for 10%.
5) The types of credit accounts for 10%.
The credit score ranges between 300 and 850, with 850 being an excellent score and 300 being the worst score possible. Having balance close to your credit limit this may lower your score. The duration of your credit history directly influences your score, the longer your credit history higher will be your score. Applying a new line of credits or credit cards will have a negative impact on your score, so opening too many accounts in a short period is not advisable.
There are numerous advantages in having a higher credit score, the most important though is lower interest rates on your repayment. By proper management of your finances and regular monitoring of your credit score can help achieve a good credit score. It is important to note that home ownership, income, location, occupation or denial of credit has no role to play in calculating your credit score.
The three major credit bureaus Experian, Equifax and TransUnion use this model in calculating your credit score. Of late TransUnion has become the widely used credit bureau among top lenders.
One of the major drawbacks of credit scoring that it relies on the information provided in your credit report. A recent study shows that around 75% of the credit reports contain at least one error. So, it is very important to monitor your credit scores and credit reports regularly.
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If you are running a business you can check your credit report from Equifax