Reader question:
I checked my credit report before buying a new car, but I don’t understand how they figure out the score. How do credit bureaus figure out a credit score? What’s the credit score rating scale?
Margie
Great question.
Your FICO credit score has a huge impact on any big buys, and some small ones, that you make in your life. Because of that, it’s a good idea to know what it is. So what is it? Developed in the 1950s by the Fair Isaacs Company, the FICO credit score rating scale is a way to determine, based on information about a person, if they will be a high risk when it comes to lendingor otherwise giving credit to them. The FICO is comprised of many factors that tell lenders about you and inform their decision to give you credit.
There are the five main factors that go into determining your FICO credit score:
- history of past payments. Do you normally pay on time? Do you have any closed accounts that are still not paid off? These sorts of things, basically how well you have comported yourself in paying off things like loans, cars, and credit cards reflect on whether or not you will be a good person to give money to.
- Debt. Do you have any accounts on which you owe money that is past due? How long have you owed money on those accounts? Have you even tried to pay them off? This is the part of your credit report that will have the worst affect on you. Even a payment of less than one hundred dollars that was ignored for a long time can have a bad effect on your credit score.
- How long have you been building your credit? No credit history can be just as bad as bad credit history. For this reason, it’s difficult for young people, even those who make decent money, to buy a car without a cosigner–because they don’t have enough credit history. Even older folks can get stuck with no credit history by getting their credit from the wrong places–out of the way little car dealerships don’t usually report to the credit bureau unless you mess up, after all.
- How much credit you’ve been trying to get recently? If you’ve been applying for every credit card on the face of the earth, it looks bad. Obviously, you had to apply for so much credit because you had bad credit and were turned down, so why should anybody else trust you?
- What kind of credit you’ve got. Major credit cards and new cars will look better on your report than a payday loan that you pay a hundred dollars on every month.
Cheers,
Fashun Guadarrama.