For all the attention credit scores get, they are generally misunderstood by consumers.
First, they are not a factor in everyday life. The credit score matters only when you take out a loan, such as for a car, a house, education or new credit card.
Here’s how a score is calculated:
35 percent: Your financial history, whether you paid on time and if not, how late you were and how often.
30 percent: How much you owe on each account and how much of your credit limit you have used.
15 percent: Your credit history, how long you had each account.
10 percent: Types of credit, such as home loans, car loans, and credit cards. Secured loans are best.
10 percent: New credit, how many new accounts or credit checks you have had by present or prospective lenders. A credit check knocks about 15 points off your credit score.
Some points to remember
* A credit score doesn’t reflect your whole financial picture. You might have a lot of savings, assets and investments, but they don’t count. How much you owe and whether you pay on time is all that counts on your credit score.
* It doesn’t matter if you carry a balance on a credit card. The total you owe and whether you pay on time are what count.
* The FICO score is the most widely used score, but it isn’t necessarily the one you might see advertised. There are three credit bureaus: Equifax, Experian and TransUnion, all of which sell their own scores.
* A history of late payments is wiped off your credit score after seven years.
* Good credit lasts at least 10 years, even if the loans are paid off.
* You will probably never have a score of 800 or more, but the high 700s is the best credit area to be in.
* If your score is in the 600s or low 700s, you should try to raise it by paying on time and reducing the amount of debt you have in relation to the amount of credit available to you.
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