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What Makes Up Your Credit Score?

Your credit score is important. It can mean the difference between being denied or accepted for credit. It can also determine the interest rate on a loan. And it could even determine your eligibility for a job one day.  It is important to understand all that goes into your credit score.

FICO dominates the market in determining your credit score. According to FICO.com, “90% of all financial institutions in the US use FICO in their decision-making process.”

What Makes Up You Credit Score?

Payment History: Making on-time payments and not having late payments on your report. Missing a payment can affect your credit report.

Amounts Owed: How much do you owe on your accounts? This is also called credit utilization. When I see a credit report with a low score but all payments have been made on time, this is the main cause. Your score goes up with the more credit you use.  However, if your card has a $1000 limit on it and your balance is $300 your score will start to decrease. Scores go down when you have one or more cards with balances close to the credit limit.

Length of Credit History: How long have your accounts been open? And since they have been opened, how is your payment history with them?

Types of Credit Used: Do you have a variety of accounts?  The best thing is to have a mix of installment accounts (those with a set number of equal payments or mortgages and credit card accounts.)

New Credit: If you apply for a lot of credit in a short amount of time, this will affect your credit score. The inquiries into your credit history also affect your score.

As you can see from the FICO diagram above, payment history and amounts owed or credit utilization are the top two reasons people have lower credit scores. It is best to focus on your credit building efforts and maintaining on time payments.  Keeping balances low relative to your credit limits is also very important.

What You Can Do:

To ensure that your credit report is accurate and to learn what your credit score is, you can go here to receive a free copy of your report.  Khan Law is here to help if you are experiencing debt and financial troubles. Sign up for a free consultation to learn more about your options.

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