In addition to banks and lenders, there are landlords, merchants, employers and insurance companies jumping on the credit score bandwagon. These might include things like the type of property you are using the loan to buy, how much of your own money or equity is going into it, the costs the lender pays to make the loan and so on. When it's all said and done, just how important is this magic number? And what does it mean for your interest rates?Īlthough the score has a big impact, keep in mind that there are other factors that influence the interest rate you get for a loan besides your credit score. Some lenders also have their own scoring methods, which may include information such as your income or how long you've been at the same job. Equifax has the BEACON system, TransUnion has the classic FICO Risk Score system, and Experian has the Experian/Fair Isaac RISK system. The three major credit bureaus each have their own version of the credit score, all of which are based on the original Fair Isaac scoring method. This information is compared to the credit performance of other consumers with similar histories and profiles. It will help your score to show that you have had experience with several different kinds of credit accounts, such as revolving credit accounts and installment loans. 10 percent of the score is based on the types of credit you currently have.However, the score interprets several hard inquiries within a short amount of time as one to account for the way people shop around for the best deals on a loan.
Hard inquiries are those you've given lenders permission for, as opposed to soft inquiries, which include looking at your own score and have no effect on the score. This category also penalizes hard inquiries on your credit in the past year. Opening new credit accounts will negatively affect your score for a short time. 10 percent of the score is based on new credit.Why? Because more information about your past payment history gives a more accurate prediction of your future actions. The longer you've had established credit, the better it is for your overall credit score. 15 percent of the score is based on the length of time you've had credit.The rule of thumb is to keep your card balances at 25 percent or less of their limits. How much do you owe on car or home loans? How many credit cards do you have that are at their credit limits? The more cards you have at their limits, the lower your score will be. 30 percent of the score is based on outstanding debt.The more recent, the worse it will be for your overall score. When these things happened also comes into play. The score is affected by how many bills have been paid late, how many were sent out for collection and any bankruptcies. This makes sense since one of the primary reasons a lender wants to see the score is to find out if (and how promptly) you pay your bills. 35 percent of the score is based on your payment history.
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