How is your credit score calculated
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Even though your life shouldn’t revolve around money, the fact is, finances are important and your credit score matters. Most people know they should strive for good credit, but when it comes to how this score is calculated, and how to improve it, many North Carolina consumers don’t understand the nitty gritty details that drive the calculation.
FICO is an acronym for the company that invented the most-used credit score calculation – Fair Isaac & Company. FICO scores are used by all three credit reporting agencies – TransUnion, Experian and Equifax – although each uses a slightly different calculation. FICO scores and credit reports are NOT the same thing.
What Is a FICO Score?
Think about it this way: Your credit report is a roster of your activities. It shows your loans, credit cards, collection accounts and other activity related to debt and creditors. It’s simply a list of your open and closed accounts over the past seven to 10 years, plus activity on those accounts, balances owed, the type of debt you're taking on, and whether you’re current on your obligations or not.
From that information, a FICO or credit score can be calculated. Different aspects of your report are evaluated by the three reporting agencies to come up with your score. Scores range from roughly 300 to 850 depending on the credit agency and score methodology they used.
A score below 500 is considered a “bad” credit score. Scores under 600 are considered “poor.” Fair scores are 601 to 660, 661-780 is “good” and 780 and up is “excellent.”
Five elements play into the math of the credit score calculation. Payment history, amounts owed, length of credit history, types of credit accounts, and recently opened credit accounts are all factored in. Payment history is the most important component, making up 35% of your calculation.
How Is the Score Calculated?
Balances owed makes up 30% and, as such, are the second most weighted component. Length of credit history makes up 15% of your credit calculation. Types of credit accounts and new credit accounts each make up 10% of the score calculation. What this means is that your payment history is the most important aspect of your credit score calculation.
If nothing else, always paying your bills on time, particularly those that report to credit agencies, is the first step toward protecting and improving your credit score. Your score is important even if you’re not planning on applying for new credit since it determines many other things in life.
For instance, your credit score may determine whether or not you must put down a deposit to get utility services, how much you pay for variable rate services, and whether you can be denied for “non-essential services” such as cable and Internet. Credit score also factors into acceptance and rates for car insurance and certain leasing agreements.
The bottom line is that, like it or not, your credit score matters. If you recently filed North Carolina bankruptcy and are looking for ways to improve and rebuild your credit score, contact Credit Score Keys now for a free consultation on cleaning up and improving your FICO score after bankruptcy.