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Your Credit Score: How Is It Determined?

written by: Dale DeVries•edited by: Jason C. Chavis•updated: 6/29/2011

You may know what number your credit score is but have you ever wondered how that number was determined? By understanding how the credit bureaus come up with your score can help you to improve it, or at least, not allow it decline.

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    Where The Score Comes From

    Your credit score answers the question lenders want to know. Is this person credit worthy? How that score came about is a mystery to most people. A company called the Fair Isaac company came up with a system that assigns points to credit relevant questions. As new information comes in, the score is updated. This score is known as your FICO score and is used to determine your approval, denial or rate and terms of a loan you have applied for. When a lender receives your application for a loan, most request what they call a tri-merge credit report. This report has a score from each of the three major credit reporting agencies, Experian, Tran Union and Equifax. Each agency will have a slightly different score. The report will include your performance on all present and past loans. It will also include such things as judgments, charge offs, bankruptcies and foreclosures. The lender who requested your credit report will know if you’ve paid your loans on time and even your credit balance to credit limit ratio. Sometimes the lender will know more about you than you do.

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    The Majority of Your Credit Score

    The breakdown for the FICO point system is actually done with percentages. The range of the score is 800, being a perfect score to 350 being a very poor score. Each percentage represents one of those questions lenders want to know. The first 35% of your score relates to how you have made your payments, or credit history. Keeping your payments on time will raise your score, late payments will lower it. The heaviest weight is put on your most recent credit. The next 30% is a determination of how much money you owe. It also takes into consideration how much you could potentially owe. Your mortgages, lines of credit, car loans and credit cards are the biggies. If you have high lines of credit and limits on your credit cards, you have the potential for owing more. If these things are already maxed out, it will bring your score down. To keep a good score in this category, keep low balances and don’t charge more than 50% of your limit.

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    The Lesser - But Still Very Important - Part of Your Credit Score

    A 15% of the score is called length of credit history. If you’ve had an open credit card for a long time and have always paid the payment on time, this will improve your score. Going from credit card to credit card to obtain better rates or get the 0% transfer for 3 months deal will hurt this part of your score.

    The next part of you score is determined by the different types of credit you have. This section is worth 10% and FICO scores higher if you have a variety of loans, such as a mortgage, car loan and credit card. The last 10% is calculated by seeing how many times you have requested credit recently, otherwise known as inquiries. Too many inquiries will negatively affect your credit score. You can do this quiet innocently just by car shopping. Every car dealer you visit will run your credit if you let them and each time they do, it is registered on your credit report.

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    Obtaining Your Credit Score

    You credit score can effect almost everything you do today from buying a home to determining how much you pay for your car insurance. Leaning all that you can will help you to build strong credit or repair damaged credit. If you want to know your credit score, go to: http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre34.shtm. This is the official site of the FTC and you can order a free credit report from the three biggest credit reporting agencies. They also give you information on other sites that offer free credit reports and which ones to stay away from.