Frugal Living

What Does Your Credit Rating Measure?

What Does Your Credit Rating Measure?Many of us go through the first years of our adult life hearing about credit ratings and reports, but not really understanding what they are used for and what they measure specifically. A credit score is also sometimes referred to as an FICO score, and it a tool which was created by the Fair Isaac Corporation, hence the name. Your credit score details how much of a risk you are to potential lenders and if they should invest in lending you money or not.

Because this is a fairly ambiguous way of measuring a person’s financial viability, it is not actually known exactly how that corporation calculates this measurements, however there are a few main factors which come under scrutiny.

  • Payment history (35%)
  • Amount owed (30%)
  • Credit history and length (15%)
  • Current credit (10%)
  • Type of credit (10%)

There is no one factor which determines how high your score will be, and because of this it is calculated using a rough weigh up of all of the factors above in different priority. To give you a breakdown of the importance of each category, we will go through exactly what they mean…

Payment history

This is the most crucial part of your credit score and it demonstrates how you have handles previous credit situations and what your payment habits have been like. Ideally you will have a history where you have always paid your debts off on time and never not been able to pay a loan off. It will also take into account if you have ever had issues paying and how well you have adapted to the situation and resolved the issue. If you have a history of bad payments, this is of course a difficult situation and you may need to get credit repair services
involved to help you know what to do.

Amount you owe

The second biggest factor in determining your credit score is the amount of money you currently owe. This will be a calculation based on any open credit you have or have had in the past which you still have to pay back. Ideally you will have paid off your loans as you go along, but we all know that things happen in life which can make this difficult.

Credit history length, new credit, type of credit

All of the other factors which affect your credit rating are pretty simple to get your head around. The length of your credit history shows how many different credit types you have ever used and will detail all of your payments. The length of your history can work in your favour because if you have consistently paid off your debts for the last 10 years, you will be seen as a safe bet when it comes to lending. The new credit is any credit you currently have. The less you have the better, and the last is the type. This can be a mortgage, credit card, car loan, phone contract etc… and it gives the lender an idea of what money you have and what you can afford.

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