What’s in a Number? The factors of your Credit Score

The term credit score is everywhere, and depending on your current value, it could be the difference between you and thousands of dollars each year. According to Experian, the nation’s average credit score is 680 and, considering a credit score considered in good standing is above 720, this can cause some concern for Americans. But the real question remains: what makes up this mysterious number?

Your credit score is essentially your financial reputation, grade and potential all wrapped up into 3 digits. The score can range from a 380-860 and, for most people, fluctuates regularly. The key to the credit score is to keep it high; the higher your score, the higher the likelihood you'll be approved for a loan (like for a house or a car), the lower the interest rate you'll pay and the less concern you’ll have when applying for an apartment or even a job.

 

Your Credit Score, Report and History are all different, but all affect your ability to get a loan.

What determines this number?

This number gets established when you have your first credit line. That could be your first credit card in college, your first vehicle loan or even that first department store charge card. Good or bad, that line of credit will stay with you. An article from CNBC.com breaks down the credit score into five main categories: payment history, amounts owed, length of credit history, type of credit used and new credit. While you do want to have a variety of different credit types and to minimize your outward pursuit of new credit, the first three factors listed are the most important in impacting your score.

Late and missed payments affect your score negatively, while continuous, regular payments help increase your score. Also, be sure to check the capacity of the credit available on revolving credit lines.  For example, if you have a credit card with a $5,000 credit line, but you have used $2,000 of that line, you have $3,000 credit available, or 60%. This number, or the total capacity, plays a very important role in determining your score. If your capacity is too high, then your credit lines are maxed out and you appear as a higher loan risk in the eyes of a lender. Therefore, if you have low capacity, you will have a lower score.

Also, the length of credit established plays an important role in your score. If you are over 18 and have had no credit lines established, we recommend that you open at least one trade line and use it regularly. This is because with no credit history, lenders have no way of knowing what kind of person you are in regard to how you handle your money.  A great product for this is a credit card, and this article at About.com can present advice on how to build your credit with a credit card.

If you want to find out your credit score, Florida Credit Union offers members a free copy of their report and credit score as a benefit of being a member.

So tell us: What questions do you have about credit scores?

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