How Does the Credit Score Point System Work?
Credit is one of the most important aspects of consumers’ present and future finances. Very few people can manage to go throughout life without using credit at some point. Some people end up with bad credit along the way, and they have no idea how the credit score point system actually works. Consumers must enter the credit field with a clear understanding of how lenders view their credit history.
The Credit Score Point System
The 3 main credit reporting agencies (Equifax, Experian, and TransUnion) all use variations of the Fair Isaac scoring system. The system calculates the credit score and is better known as the FICO score. It is important to remember that each of the credit agencies may have vastly different scores and reported information for each client. Lenders report information differently so consumers may have unreported information on one or more of their credit report.
The credit scoring system is calculated as follows: 35%- payment history, 30% – amount owed, 15% -length of credit, 10% – new credit, and 10% – types of credit.
Factors That Affect Lending
When lenders look to extend credit, they look for consumers with the good payment history. They want to know that consumers are capable of handling credit over extended periods of time. They are a little hesitant about lending to new borrowers with many new accounts since these consumers have yet to establish a good payment history.
The amount owed is one of the biggest factors that can affect a credit score. Owing to much money to lenders can reduce the chances of receiving a loan. Maxes out credit cards or having too many cards close to the limit can greatly lower the credit score point system. Consumers should keep their balances low on revolving debt to maintain a good credit score.
Consumers need to establish credit over a length of time. The accounts that consumers have had for the longest amount of time greatly increase their credit score—as long as the accounts are in good standings. Too many new accounts can lower the credit score and give lenders the impression that consumer are not worthy of extending credit.
Lenders do want to see that consumers receive new credit from time to time, and it really does not matter what kind of credit consumers receive. This aspect of credit only accounts for 10% of the credit score, but it is enough to hurt a consumers’ credit score and prevent them from receiving credit. Consumers should apply for new credit every few years to improve their credit score.
Lenders also look for different types of credit when it comes to lending to consumers. For example, student loans, auto loans, personal loans, credit cards, and department store credit cards offer a good mix of credit. Consumers must receive different types of credit to be considered a strong candidate to extend credit.
The credit score point system works to offer consumers multiple opportunities to have good credit. Consumers now know what lenders look for in customers, and consumers know how the score is calculated.