What You Need to Know About the Credit Score Scale and How it Affects You

The credit score scale, more commonly known as FICO, was developed by Fair Isaac and Company.  This is actually a statistical way to measure someone's credit worthiness.  The credit score is determined by the information the credit reporting agencies have on file for an individual.  The credit score scale can range from 300 to 850.  Although in 2006, this was changed somewhat.  Now it is said the scores can be from 400 to 990. 

The question most people ask is how is the score determined.  Although there is no set in stone algorithm, which dictates how the credit score scale is determined, there are certain contributing factors.  The most important, weighing it at a hefty 35%, it how well you pay your bills on time.  The better your payment record the better the FICO score.  This only makes sense because the score is a rating to determine if you are a bad credit risk or a good credit risk.  When you are constantly late or fail to make the payments, very few lenders will want to take the chance of lending you any more money.

The second heavy hitter is the total amount of debt you have.  30% of the credit score is decided by what you owe.  Also factored in is the amount of credit you have left.  You may owe $20,000 but if you can still access another $50,000 you are doing well.  However, if you can only take advantage of another $2,000 you may be in trouble.  The banks feel that anyone who is living close to their credit limit may have a problem handling their money.  It means they are trying to live a lifestyle they do not normally have the required cash to support.

The longer you have had an established credit history the better.  15% of your total credit score is based on this factor.  The longer your credit history the better it is for you.  You may only have a year or so under your belt.  Even though you have made your payments on time, the lender feels you may not have run into any financial difficulties and may not know what to do when this happens.  In other words, the more experience you have in handling your bills the better your credit score, at least if you handled them properly.

With 10% of your credit score scale being based on how often you apply for credit, the less you do it the better.  In many cases, lenders have found that when someone gets one credit card, they run it to it's limit, and apply for another one.  This creates a vicious cycle.  The credit gets extended until the consumer is over extended.  The accounts go into default.  It is advisable to only apply for once every six months.  This ensures there are no credit checks, which can reflect poorly on your credit score.

The last 10% is based on what types of credit you have.  If you have only credit cards, this does not show whether you can actually pay off a debt.  A car loan or mortgage which has been paid off reflects highly on your credit score scale.  This means you can manage to make the payments for a committed period of time.  It is advisable to have at least one term loan, as well as, revolving charge accounts.  Variety is a good thing.

When you have the opportunity, it is advisable to check where you measure on the credit score scale.  The higher the number, the better it is for you.  Also, you can determine if there are any problems that must be corrected or addressed.