Understanding Your Credit Score
In almost all advice articles you’ve read about car loans, the importance of the credit score is mentioned. This score is composed of three digits and it will get your loan application either approved or rejected.
The credit score is the result of mathematical calculations done based on information found in your credit report. Such mathematical calculations cannot be revealed just as the interpretations of the Rorschach Ink-blot psychology test cannot be made public. If everyone knows how the credit score is calculated or how the ink-blot test is interpreted, the results of these will be compromised and such assessments will become useless.
However, some information is now available so that the average person will have a general idea of how credit scores are computed. The most common assessment utilized for determining the credit score is the FICO or the Fair, Isaac, and Company. This assessment identifies five variables that determine the credit score. These are; 1)payment history; 2)outstanding balances; 3)length of credit history; 4)new credit; and 5)types of credit used.
About 35% of the FICO score is based on the person’s payment history. This uses information about the payments made to financial obligations such as credit cards, charge cards, and mortgages. It will also use details about whether you have made late payments. If you have made late payments a long time ago (five or ten years past), your credit score will not be affected much. But if your late payments are recent (two months ago), the FICO will assume that you are currently having financial problems and may not be capable of meeting additional loan obligations. Your credit score will take a plunge.
About 30% of the FICO score is based on outstanding balances. The number of outstanding balances will not really matter. What will matter is the amount of the balances. For example, a person may have ten accounts and their total would be around $2,000, and another person may have three accounts but the total will be around $9,000. If the latter is already at his credit limit, he will get a lower credit score than the first person.
About 15% is determined by your credit history. If you have a long credit history, you have proven that you handle loans well. This will increase your credit score. If it is your first time to apply for a loan, then, there isn’t much you can do to improve your score.
About 10% is based on new credit and another 10% on the types of credit used. If you have recently applied for several new credits, your score will likely go down. Credit types refer to installment loans, retail accounts, credit cards, and mortgages. Not much information about these was released by FICO.
FICO scores ranges from 300 to 850. A score of 720 and above indicate an excellent credit while a score of 620 and below imply a marred credit.
You may freely reprint this article provided the following author’s biography (including the live URL link) remains intact:
About The Author
John Mussi is the founder of Direct Online Loans who help homeowners find the best available loans via the http://www.directonlineloans.co.uk website.
