A credit score is the terminal product of a complicated formula that is used by credit reporting agencies to forecast risk for loan lenders and creditors. The credit score is ascertained by using information in your credit report, applications and/or account history.
The primary purpose of the credit evaluation is to determine the timely payment of accounts, as well as any delinquencies. Creditors and lenders use credit scores to decide:
Issuance of credit or loan
Level of loan or credit card interest rate
Raising credit limits on a current account
Insurance companies routinely use credit scores to aid in determining:
Issuance of insurance policies
Renewal of existing policies
Policy premium rate
Additionally, the employers use your credit history to make employment/hiring decisions. The main credit bureaus are Trans Union, Equifax, and Experian. The credit score is also known as the FICO score. Many lenders including, home loan lenders use merged credit reports that integrate credit scores and other credit information to make mortgage decisions.
It is critical to understand that your credit score is commonly updated due to changes in your credit report. The credit score is composed of five categories:
Debt owed 30%
History of payment 35%
Type of credit in use 10%
Any new credit 10%
Credit history length 15%
The two most important factors that make up your score are your existing balance and payment history. Combined, the two factors make up about two-thirds of your entire credit score. You must focus on things that are in your control to improve the credit score, such as paying down your debt and bills on time.
Credit Inquiries Affect Credit Score
Whenever a creditor, employer or lender performs a credit check, an inquiry is listed on your credit report.
Many credit checks in the last few months to a year can negatively impact your credit score. The following credit checks do not affect your credit score:
Insurance or employment/hiring related inquiries
Request of your own credit report or score
Mortgage or auto loan credit checks performed in a short time period are combined and are generally counted as a singular inquiry (not applicable to credit card inquiries)
Pre-approved credit line or credit card reviews for promotional offers
Irrespective of what your debt situation, never cancel your credit cards. The termination of credit card accounts can negatively affect your credit score. Remember, one of the factors affecting your credit score is the credit history handling of the account. Once you cancel a card account, you limit the information available to credit reporting bureaus that helps them extrapolate your future payment actions.
Also, you will decrease the length of your average credit history in calculating the credit score; a longer credit history is superior.