What Makes Up a Credit Score?

We are all currently being faced with the current economic downturn. This has led many of us to find ourselves with financial strain that has had an impact on our credit score.

If you have ever applied for a loan for a home or a car, you know the single most important factor in your approval is your credit score.

There has been a lot of confusion of what a credit score really is and how it is worked out. This article is aimed at clearing up all the myths in regards to what makes up a credit score, by providing you with the simple facts.

Your credit score is made up of 5 major categories. These include Payment history, Outstanding Debt, Depth of File, Inquires / New Credit and Types of Credit.

Now the amount of weight that each category carries in regards to your final credit score varies. The two largest weighing categories are Payment history and Outstanding Debt at 35% and 30% respectively. The remaining three categories are quite smaller in terms of percentages for depth of file, Inquires / New credit and types of credit at 15%, 10% and 10% respectively.

Now we are going to look at each category individually and what it consists of.

The first category of payment history speaks for its self. It is one of the largest weighing factors, making up 35% of your final credit score. It simply looks at whether or not you have paid your bills on time. When ever you receive a bill you are usually given a certain time period by which you are expected to pay it within. If you meet that time limit, the creditor will report that you have made your payment on time. If you pay more than 30 days past the due date, the creditor will report your payment as delinquent.

The second category that holds the most weight at 30% is outstanding debt. This simply returns on the outstanding amounts of money that you still owe to other companies. To be able to apply for any sort of finance, it is important that this is kept to a minimum. This will show that you are able to keep up with repayments. If you have a large amount of money outstanding in debt, you could be digging your own grave.

The depth of file weighing at 15% simply looks at the time period of your credit history. Even if you don't want to use the credit card that you opened in 1986, you should keep the account active because the age of the account will reflect positively in your score.

The remaining two both at 10% are Inquires / New Credit and Types of Credit. The Inquires / New credit basically looks at past inquires that were made when you applied for credit. The fewer amount of inquires you have, the better it is when applying for new credit.

The final category of types of credit looks at the types of finances that you have taken out on credit. Some are classes to be bad compared to others. For example going for installment loans is more preferred in comparison to a loan from a finance company.

By understanding what makes up a credit score, you can take control of your finances and secure your future!

Source by Wendy Polisi

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