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What Are The Main Components On My Credit Score?

 | Jul 21,2007

Your credit score is a three-digit number assigned to you by the three credit scoring bureaus. The more responsible you've been with paying debts, the higher your credit score will be.

Realize, of course, that a credit score is a cold-hearted number. It does not care about accidents, sicknesses, divorces, addictions or any of the countless every day life things that commonly happen to good people.

Three Credit Reporting Companies - Three Scores

Experian, Equifax and TransUnion are the three credit bureaus used by businesses in the United States to investigate your credit history. They each use a different method to score your credit worthiness. All three call their score by a different name. But primarily they are all akin to a FICO score.

FICO stands for Fair Isaac & Co. Back in the 1950s, this company started credit scoring. They came up with the formulas which predict a customer's penchant for being 90 days late on a payment.

While you can purchase an "educational" score which models FICO scoring methods, the credit bureaus keep their exact formulas private, which is legal, according to the Federal Trade Commission.

The Main Components of Credit Scoring

The biggest two areas that influence approximately two-thirds of your credit score are your payment history and your current debt.

1. Your Payment History: This is the record of your debts, bankruptcies, suits, liens, foreclosures, etc. It shows if you ever make late payments or if you pay your bills on time.
2. Your Current Debt: How much do you owe and based on how much you make?  Can you handle any more debt?  Other concerns: How long you've had credit, the type of credit you've had and how much credit you're currently applying all impact your credit score in similar ways.  These three areas account for the last 30 percent of your credit score
   

• Your Length of Credit History: This is how long you've had credit. Creditors like to see a person who has been responsible for a long time.  Even if you've been perfect with paying bills, it will still result in a low rating if it's only been for a short period.
• Your Types of Credit: Creditors look at the different types of credit you've used, anything ranging from car loans to mortgages to retail accounts.  Large loans carry a larger weight. 
  
• Your New Applications for Credit: If you've been applying for a lot of credit lately, it's a red flag to the credit bureaus.  Say you've opened up 5 credit card accounts in six months.  This makes you appear like an unstable risk.  

Conclusions about Credit Scores

A good credit score is important. Top tier credit is going to make life easier by giving you easier access to borrowing money. It's going to have an impact on how much you pay for money you borrow.  Interest is lost money - it doesn't go towards paying off your balance, so you want to lessen interest as much as possible.  It can even influence a potential employer's decision to hire you or the premium you pay for car insurance.  All in all, your credit score is as important as the amount of money you have in the bank.  

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