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Credit Scores

How Credit Scores Are Calculated

Credit providers use credit scores as a way to gauge risk. Scores based on payment history are a predictor of how well borrowers will pay their debts in the future. Many credit scores rating systems are available from each of the three main credit bureaus, Equifax, TransUnion, and Experian Corporation, as well as other companies. In order to improve credit score ratings and maintain a good credit score, it is important to understand the basics.

Improving Credit Scores With The FICO Credit Scores Rating System

The FICO Scoring system is the standard scoring model for consumer credit, used by most lenders. FICO stands for Fair Isaac Corporation, the company that created the specific scoring model, and owns the rights to the formula used to calculate personal credit scores. While FICO scores range from 300 to 850, there are many factors that contribute to specific numbers and help improve credit scores.

Individual credit scores are based on the following:

    • 35% Payment History
    • 30% Total Debt
    • 15% Length of Credit History
    • 10% New Credit
  • 10% Type of Credit

Contributing Factors To Credit Scores Rating Numbers

Payment history reflects the account holder’s pattern of paying the monthly payment on time. Most lenders only report payments to the credit reporting agencies that are late after 30 days from the due date. The number of times a late payment was made, the number of days the payment was late, and when the most recent late payment occurred are all factored into payment history.

Total debt considers the sum total of all current credit balances, as well as the “usage ratio”. Usage ratio refers to the percentage of credit currently in use compared to the amount of credit available to consumers. A usage ratio that is high will negatively affect individual credit scores.  Your score goes up if you pay off your credit card debt.

Length of credit history applies to the length of time for which an account has been open. Negative payment history is weighted differently for new accounts than it is for long established credit. Derogatory credit reported on a new loan or credit card brings down a credit score further than that of late payment history on an older credit card or line of credit.

New credit takes into consideration any credit accounts opened recently and credit inquiries made to the consumer credit file. A credit inquiry is created every time a consumer applies for a loan or credit card. An entry is made in the credit profile indicating that a credit report has been “pulled” or accessed by a potential lender or creditor. If too many credit inquiries appear on a consumer credit report in a short period of time, this could signal to a lender that new credit accounts have been opened and the consumer may already be over indebted. This can also lower a credit score considerably.

The type of credit used is taken into consideration when determining a credit score. Bankcards and bank loans that the consumer pays on time help raise a consumer credit score. Loans originating from finance companies are considered in the credit score as well. Bankcards and loans from major banks contribute positively to your credit score, while loans from finance companies, and payday loan centers generally lower a credit score.

Credit score monitoring can also help consumers maintain the right balance of credit elements to ensure the highest credit scores. If credit profiles go unmonitored for too long, consumers run the risk of inaccuracies reported by creditors or the credit bureaus themselves. Obtaining a credit report is easy and free of charge when consumers select copies of reports through the federal government sponsored website,

Each of the three major credit bureaus must provide an individual copy of its company’s credit report yearly, for consumers who request one. Many people choose to order reports from the credit reporting agencies by staggering their requests every four months. In this way, they can carefully monitor their credit profile to make sure mistakes are not made in reporting and identity thieves have not stolen their identity,

How Credit Scores Rating Values Are Used

The three main credit scores used collectively by the credit bureaus play a critical part in the credit and lending process. Credit providers base their decisions about whether to lend money to borrowers in part on credit scores and the 3 credit score ratings. The highest credit scores not only signal to the lender that you will likely pay your monthly payment on time, but will also be used to determine the interest rate you get, on the money you borrow. Since individuals with lower credit scores represent higher risk, they get assigned higher interest rates. This way, the lender will not lose money overall if even a few consumers default on their loan.

Understanding Credit Scores Through Credit Score Ranges

Credit scores fall into ranges that are determined by individual lenders. These ranges each represent a different degree of risk that the creditor will take when lending money. By using ranges to make decisions, lenders can decide more quickly and easily about which consumers are creditworthy.

Credit score ranges are as follows:

Poor Credit Scores- 500 to 559

Poor Credit Scores- 560 to 619

Fair to Average Credit Scores- 620 to 659

Good Credit Scores- 660 to 699

Very Good Credit Scores- 700 to 759

Excellent or Best Credit Scores- 760 to 850

Learning about the many factors that affect credit scores is an important first step to obtaining and maintaining healthy credit. By understanding how credit scores are determined and the process by which they are calculated consumers can begin to control their debt and maximize credit and lending opportunities. Contact a credit score professional to find out how you can get the most buying power at the best rates based on consumer credit scores.

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Jeff Dunphy

Jeff Dunphy has years of experience in the field of borrowing. He is the founder of a website that teaches consumers about credit cards, credit scores, loans, and credit repair.
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The content on is for informational and educational purposes only. It is not financial advice and we are not certified financial advisors. strives to keep its information accurate and up to date, but it may differ from actual numbers. We may have financial relationships with companies listed on our site. We may receive compensation for the placement of sponsored products or services. We work hard to write authentic and accurate articles.