Understanding Your Credit Score

There are a lot of fallacies out there when it comes to understanding your credit and what the variables are which cause your scores to fluctuate up and down. I bet if you ask 10 different people about this very mystifying topic, you’ll more than likely receive up to 10 different responses! So what’s the deal? Is figuring out your credit really THAT complicated?! The answer to that very legitimate question is both yes and no. Though the advance math algorithms used to compute your scores may be difficult to explain, truth is, when it comes right down to it, the primary philosophy has always remained the same, ‘don’t be late, and don’t borrow more than you need!’

So then, exactly who is it that determines your ability to borrow money, and just how are these mystifying credit scores calculated? I would like to first point out that the “who” who needs identifying here is YOU! Although privately owned reporting agencies are responsible for collecting and disseminating information on you (there are literally hundreds of credit reporting agencies throughout the land, all of which report to at least one of the three major credit bureaus), you are ultimately the one who controls your ability to borrow in the future. As most of you know, your credit worthiness is expressed as a 3-digit numeric score, ranging anywhere from 350 to 850. The closer your score is to 850, the more likely you are to have credit extended to you. In addition, the total amount of money accessible to you, as well as the cost of borrowing it (interest rate) will be more favorable if your score is higher. With those incentives laid before you, it’s very important to know what the factors are that boost or reduce your scores. There are 5 primary categories that determine a borrower’s credit “worthiness,” and each of them carries a different weight, 1) Payment History (35%), 2) Outstanding Balances (30%), 3) Length of Credit History (15%), 4) New Credit Established (10%), 5) Types of Credit Used (10%). Knowing how you’re being evaluated gives you a “heads up” on where you should devote more of your attention on your credit profile. In a follow-up blog, I will debunk some common credit myths, as well as offer some practical tips that will prove to be useful in improving and maintaining your credit scores...Remember to check back!