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Components That Make Up a Credit Score

By: Tom Peters

A credit score is part of your credit report, which is a file on your financial life of borrowing money. The credit score is made up of various components that we explain in the following paragraphs.  The FICO model is widely used for credit scoring and its beginnings can be traced backed to the 1950 era.

Your credit score has a major influence on what type of credit financial institutions will lend you and at what interest rates and additional conditions they may apply to the lending of credit.

To have a credit score you need to have a credit file with a history of at least one borrowing of credit.  The first component is paying on time. This is the largest scoring component at about 35%. This is why it is important to make all credit payments on time and if you cannot then contact your finance lender as soon as possible to agree on alternative arrangements. The score within this category is affect by non- payment on time but also how often this has happen, how much are the payments in arrears and how long were the payments in arrears for.

The next largest category is the amount and type of debt. This category is about 30% of your total score.  This category takes in all the debt you have, the mix of debt, the number of debt accounts you have and the overall total debt figure.  The balance of debt across your credit cards and revolving line of credit is factored into the calculation, including the amount of available credit not being used.

The number of years you have had debt is worth about 15% in the scoring formula.  You can get a good positive score rating if you have had no credit problems with your accounts and have held those accounts for a number of years. The portfolio of credit accounts you have is worth about 10% of the formula. 

Depending on the type of loan you have applied for, the lender will analyse this type of loan you have had with other credit providers.  The last category also worth 10% of the credit score is your activity over the past six months in applying for credit. The higher the number of applications, the lower your score will be.

The FICO credit score range is from 300 to 850. The average score is about 720.  Credit scores can be controversial and they are not always accurate. Some banks are not using this approach anymore, however if you are submitting an application to a lender that does use FICO, then its best to be aware of this scoring system, so you can improve it as necessary.

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Pay off more than the minimum each month. Don't be content just to pay the minimum payment amount. For those who can't pay off the whole balance on their cards, it's important to try and pay as much as possible each month. Paying just the small minimum required each month will consign you to long-term revolving debt incurring enormous total interest charges over time. Card providers have lowered the minimum payments from 3 or 4 per cent of the outstanding balance to as low as 1.5 per cent in some cases in recent years. If you can't pay more than the minimum, it's probably time to transfer the debt off the card to a personal loan at a lower interest rate.

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