If you are wondering what credit scores mean then you need to find out right now. Credit scores are the way by which credit card companies find out what type of customer you are. Here is a simple explanation of how credit scores actually work.
We depend on credit for many different parts of our life. That means even the loans you have taken on for your car and your student education can be considered as credit. A three digit number is assigned to each person who has taken a loan or a credit card to find out exactly how they rate on repayment of the loan. The credit report will tell any person who requests it how good you are at paying back what you have borrowed. It will have a record of your jobs and what you are getting paid, it will record your credit card debt and it will also have any potential loans you have taken on and how fast or how slow you have repaid it. Using the credit score is one way by which lenders can judge how fast you will pay back their borrowed money and just how reliable you are. Now till recently, these credit scores were registered on a national database and were available only to lending companies and credit card companies. But due to a recent government regulation, credit scores and even credit reports of bad credit consumers is now available for users for review. There are at present three major credit score companies that will provide private users a single reliable credit report for free once a year. You can request the first one for free and then ask for more for a small fee.
How are credit scores calculated?
There are several scoring methods that are used to keep track of the different credit methods taken on by customers. For example, the most common method used by almost all credit card companies and lenders is the FICO method. The Fair Isaac Corporation method has a simple scoring method where grades are given to nearly everything that you use credit for. For example here is as simple break down on your credit history and the credit score that was derived from it.
35% of all credit scores are assigned to your payment history. That means how fast you make your primary payments to your major utility companies and when is recorded and given a score. The score is affected by how fast you pay off the loan payments and the method of loan payments that you are making.
30% of the credit score on your credit report is allotted to outstanding debt. That means the credit scoring company can attach a value to the loans you have on your house, your car and even your credit cards. The more your loans the higher the score you get. Generally try to keep at least 25% of your credit limits to as low as possible.
15% of the credit scores is based on how long you have a loan and the type of loan it is. The longer you have a loan and the better you are at paying it back; the better your scores.
10% of your credit score is allotted to new credit.