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How to Interpret Your Credit Score

Introduction

Interpreting your credit score is easier than it sounds. Basically, the higher the score the better it is, and there are a few easy-to-understand statistical boundaries that may help you as well.

How It All Breaks Down: Understanding Your Credit Score

Remember first that this number will be between 300 and 850, and the higher the score the less the risk for the lender. This number is based in your personal credit history, and is weighted as follows:

Payment history                          35%
Credit limit/credit used ratio      30%
Length of time building credit     15%
New credit applications               10%
Types of credit                             10%

For instance, if you have a somewhat poor payment history (category 1) and have started applying for new credit (category 5), creditors may think you are about to file bankruptcy and are trying to stock up on freebies. Or you may have maxed out all your current credit and are applying for more—your limits and amount used will tell lenders whether you actually need more credit or if your digging yourself into a hole they will pay for in the long run.





Your Payment History & Your Credit Score

Payment history carries a huge weight. This is because a person’s future is very likely to be like her past—if she had trouble making payments before, she will have trouble now and in the future. A credit score will tell lenders most of what they need to know in that regard, thanks to more statistics, this time on delinquency rates.

 

What's the Cut-off Point?

Although FICO scores are calculated to provide a good prediction about whether an individual will pay back the loan, each lender devises its own strategy for determining what level of risk it finds acceptable. So the scores do count, but what they mean vary from lender to lender.

The Credit Score Range

Lenders know that statistically people with scores of 800 and above comprise 11% of the population. Their delinquency rate is 1%. Out of 100,000 people this means only 110 of them will experience delinquent payments.

 

Compare to the lowest score, or the 300-499 range. Only 1% of the population falls into this category! So it looks like much less of a total risk for the lender, right? Not when you consider that 87% of people in this category will have late payments—do the math and it makes 870 people. If you were a lender, you would want to steer clear of poor credit scores. If you had to make loans or extend credit into this category, you would probably try to make up for your losses by charging high interest rates—which is exactly what happens in the real world.

Summary & Conclusion

These scores, as you can see, are a predictor of financial behavior based on the past. So make sure your credit score and report is squeaky clean. Lenders and you will both like it better.


  

  




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