What is a credit score and how is it calculated?

A credit score is a numerical representation of your creditworthiness, which is used by lenders and others to predict the likelihood that you will make timely payments on your debts. A credit score is calculated based on the information in your credit report, which is a record of your credit history.

There are many different credit scoring models that are used by lenders and credit reporting agencies, but the most widely used is the FICO score. The FICO score is a three-digit number ranging from 300 to 850, with higher scores indicating a lower risk of default.

FICO scores are calculated using a variety of factors, including:

  1. Payment history: This accounts for 35% of your FICO score and includes information about whether you have paid your bills on time.
  2. Credit utilization: This accounts for 30% of your FICO score and reflects the amount of credit you are using compared to the amount of credit available to you.
  3. Length of credit history: This accounts for 15% of your FICO score and looks at how long you have been using credit.
  4. Credit mix: This accounts for 10% of your FICO score and considers the variety of credit types you have, such as credit cards, mortgages, and loans.
  5. New credit: This accounts for 10% of your FICO score and looks at any new credit accounts you have recently opened.

It’s important to note that the exact formula used to calculate a FICO score is a closely guarded secret, and the weightings of the various factors may vary slightly depending on the credit scoring model being used.

Next – Why it’s important to understand your credit score.

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