Your credit is tied to a profile called a credit score. It is a mathematical financial tool used by creditors to determine risk, and these creditors use this score to determine whether or not they will lend to you and if they do, what interest rates they will charge.
A credit score (also called a FICO score) is a 3-digit number ranging from 300 to 850. The higher the number, the better the credit is. In general, scores between 300 and 660 are considered to be bad credit scores, 660-720 is considered to be average and scores over 720 are considered to be good credit scores. But in today’s economy, some creditors may deem any number under 675 to be bad, and 620 or lower to be sub-prime.
Think of a credit score as a current snapshot of your credit history. Actually, you should think more in terms of credit “scores” as each financial institution, lender or retail establishment may have its own idea of what’s important to them.
There are five main factors that contribute to the calculation of a credit score, and again, each financial institution may weigh these factors differently.
One factor used is whether or not bills are paid on time – every time. Late or missed payments will negatively affect your score.
Another factor is how much credit you are using when compared with the amount you have available. Habitual credit maxing will lower your score.
The length of time you have actually had credit is another factor. New borrowers will have lower scores because they have no history for creditors to look at.
The number of credit cards or the frequency that you apply for new credit is also considered.
Lastly, the types of credit obtained are a factor. The number of installment loans versus the number of revolving credit items such as credit cards are compared.
Besides these basic factors, some lenders may or may not consider things such as job salary, job type and how often you change or lose jobs.
All of these factors are weighted, and they may be weighted differently by each creditor. Different types of credit mistakes will have different effects on a credit score. For example, missing a credit card payment will probably have more of a negative impact on a score than having too many credit cards.
And the more credit mistakes that you make, the lower your score will be.