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Credit Score
Anyone who has ever had to borrow money is familiar with the concept of a credit score. Every person has a number that supposedly tells a lender their odds of paying back a loan. Of course, if you're someone who has been denied a loan because their credit score wasn't good enough, you probably have also wondered just how that credit score is calculated. And just who has the right to say you won't pay back a loan, anyway? If you're going to get good deals on loans, you have to start by having excellent credit. We know the system needs a lot of improvement, but it's the only system that the people you need to borrow from use. |
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What is a Credit Score?
Despite what those annoying late night TV ads would have you believe, you do not have just one credit score. You don't have just three of them, either. In fact, you have dozens. Most banks and major lenders evaluate your credit history and calculate a credit score for you using their own criteria and formulas. The exact method they use, however, is a trade secret. That means they don't have to disclose to you how you can improve your score.
The three most common credit scores are the ones that are put together by the three major credit bureaus. These for-profit companies are not banks, but rather just big data compilers that gather information from banks, lenders, utility companies, and just about anyone else you've ever had to pay money to. They take that data, and use it to assign a credit score.
Despite what those annoying late night TV ads would have you believe, you do not have just one credit score. You don't have just three of them, either. In fact, you have dozens. Most banks and major lenders evaluate your credit history and calculate a credit score for you using their own criteria and formulas. The exact method they use, however, is a trade secret. That means they don't have to disclose to you how you can improve your score.
The three most common credit scores are the ones that are put together by the three major credit bureaus. These for-profit companies are not banks, but rather just big data compilers that gather information from banks, lenders, utility companies, and just about anyone else you've ever had to pay money to. They take that data, and use it to assign a credit score.
While no one knows the exact formula, there are several banks and non-profit organizations that have worked to figure it out. Using the credit scores and credit histories of thousands of consumers, they have managed to come up with rough approximations of the formulas used by these companies to compute a credit score. According to these sources, your credit score is made up of five parts:
By improving each of these areas of your credit, you'll be able to improve your credit score.
- Length of credit history
- Payment history
- Credit extended to credit used ratio
- New credit
- Types of credit used
By improving each of these areas of your credit, you'll be able to improve your credit score.