Used as a basis in determination for loans, credit cards and mortgages, credit scores play a vital role in any person’s credentials. Your credit score can literally mean the difference between being approved for a mortgage on your first home and being denied. Credit scores also plays a significant part in determining interest rates.
Your credit score is a generated mathematical algorithm that uses information from your credit report, as depicted on bankrate.com. Although there are various credit score models, most lenders use an applicant’s FICO score to determine their eligibility. According to FICO, “90 percent of all financial institutions in the U.S. use FICO scores in their decision-making process.”
There are 5 primary aspects in determining someone’s credit score: payment history, debts owed, length of credit history, new credit, and types of credit used. Each metric is weighted in different percentages against your score, with payment history and debts owed making up for more than half of your total score. Whether you are new to building credit or have a substantial number of years with credit also works as a factor in your credit score. Those who are new to credit have a different formula used than those who are not. Consumers with similar credit profiles have a formula designed for their category.
Although some lenders may have their own spectrum of what “a good credit score” is, creditkarma.com suggest a good score is anywhere between 700 and 850. Knowing your credit score is a crucial aspect in planning your financial success. Prior to applying for credit you should always review your score and know where you stand. There are various sites you can visit that specialize in managing your credit score. By doing so you have the opportunity to build your score and make yourself a more favorable applicant, thus setting yourself up for future financial success.