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What is a Good Credit Score

Posted on March 11th, 2011 | admin
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Before discussing what is a good credit score you need to understand how companies use your credit score to determine credit worthiness and the factors that are in play when calculating your credit score.

In order to understand how your credit is calculated you need to know that credit scores are based on FICO, a system of determining your credit worthiness created by the Fair Isaac Corporation.

What is the FICO Credit Score Range and What do the Numbers Mean?

The FICO score credit rating system uses several factors to calculate your credit score and the numbers range from 300 to 850, where a credit score of 300 means you’ve got really bad credit and a score of 850 means you’ve got excellent credit, credit so good that you’ve go a halo over your head in the eyes of lenders.

When the credit bureaus evaluate your credit score using the FICO system the factors they are using to determine your credit score are:

FICO Credit Scoring Factor #1 – Bill Payments

One of the most important factors in determining whether or not you’ve got a good credit score is your bill paying habits, if you’re consistently on time in paying your bills including utility bills, mortgage payments, credit card payments and even your cell phone bills then you’re going to score higher on your FICO score than somebody that misses payments or is frequently late paying bills.

FICO Credit Scoring Factor #2 – Debt Owing to Creditors

The second most important factor in determining your credit score is how much debt to you currently owe and not only how much do you owe but how much credit to you currently have available to you.

For example, if you’ve got a line of credit for let’s say $10,000 and a credit card with a limit of $5,000 however you have a zero balance owing on both lines of credit, your credit score is still adversely affected by how much credit you’ve got at your disposal right now. That’s right even with a zero balance owing on your lines of credit it’s still potential debt you could be in if you decided to use those credit lines and that’s why having credit available has an impact on your credit score.

FICO Credit Scoring Factor #3 – Credit History Duration

The next factor that plays into calculating your credit score is how long you’ve had credit for. The length of time that you’ve had an established credit history is an important credit scoring factor with the Fair Isaac rating system because it shows lenders how well you’ve paid your bills on time over a period of time.

The longer period of time that you’ve had credit is going to impact you’re credit score so if you’ve for the sake of an example had credit cards, car loans, a mortgage or any other personal loans for 8 years and always paid each and every one of your bills on time then you’re going to get a higher credit score however on the flip side of that, if you’ve been paying your bills on time for the last 6 months but the prior 6 months you missed a lot of payments due to job loss or whatever circumstance happened then you’re credit score is going to be lower.

FICO Credit Scoring Factor #4 – How Much New Credit You Have

Your credit score is also impacted by how much new credit you have, if you’ve recently got a lot of new debt in the last few months and are applying for more credit, you’re FICO credit score will be lower because with the more debt you take on the higher the risk to the lenders.

FICO Credit Scoring Factor #5 – Miscellaneous Factors

The final factor that’s used in calculating your credit score is what types of credit and debt you’ve got. If you’ve got 5 credit cards, no mortgage and a car loan then you’re FICO score is going to be lower than somebody who’s got positive equity in their house and only has a mortgage payment.

What do the FICO Credit Score Numbers Mean?

Here is a FICO score chart that shows you what is a good credit score and the full range of scores.

The final thing you need to know is there are 3 major credit bureaus and even though they all use the FICO credit scoring system they may not have accurate data about your current credit situation so the scores can vary between the major credit reporting companies, TransUnion, Equifax and Experian so it’s VERY important, especially if you want to apply for new credit that you get a 3-in-1 credit report and if there’s any discrepancies in your credit reports from the 3 major credit bureaus you’re going to need to call them to get your report straightened out.

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