What Is a Credit Score?
A credit score is a mathematical model consisting of numerous variables used to estimate one’s credit risk. The most commonly used model is called FICO® (named after its creator, the Fair Isaac Company). Everyday, the FICO credit score is used to evaluate millions of people who are applying for some type of financing.
Your FICO® credit score is used to evaluate your creditworthiness by giving you a certain amount of points based on the information contained in your credit report, in particular, how much debt you have and how you pay your debt. The highest score a person can receive is 900; the lowest is 300. Very few people, even those with perfect credit ratings and no debt have a 900 credit score. About the best one can ever achieve is 850.
How Is a Credit Score Calculated?
How you pay your bills and debt accumulation are the two most important factors in calculating your credit score.
You Have Three Credit Scores
A lender can acquire your FICO credit score at Experian, TransUnion and Equifax. The credit bureaus have different names for their FICO credit scores:
Experian — called the “Experian / Fair, Isaac Risk Model”
Equifax — called the “Beacon credit score”
TransUnion — called the “Empirica”
How Credit Cards Affect Your Credit Score
Credit cards can affect your credit score in both positive and negative ways. Officially closing a credit card account will lower your credit score because it (1) might reduce the length of your credit history, which accounts for 15% of your credit score, and it (2) lowers the total amount of credit you have available, which will raise your debt to available credit ratio.
How Inquiries Affect Your Credit Score
A credit inquiry is a notation made on your credit report when a business pulls your credit report. The number of credit inquiries that appear on your credit report affect your credit score; however, they constitute only a small percentage of your overall FICO credit score. Too many credit inquires on your credit report can lower your score, but usually not significantly. A good estimate is to assume that each credit inquiry will lower your FICO credit score by no more than five points; however, many credit inquiries do not lower your credit score at all.
How to Improve Your Credit Score
You’ve probably heard many times by now how to improve your credit score: pay your bills on time each month and don’t accumulate too much debt. In a nutshell, that is all you have to do. Eventually, as your late payments, charge-offs and other sins of the past fade in to memory, your credit score improves.
If you pay your bills on time and don’t accumulate too much debt, your FICO credit score can change significantly in a few months? How much? If your score is low, it can change dramatically; if your score is already high, there will be little or no change.