Also called a FICO score, your credit score is a powerful and important number. It can not only determine the rate you get on a car loan or mortgage, but also whether you qualify in the first place for such loans. Knowing your number, which can range from 300 to 850, allows you to assess your personal financial situation and, if necessary, take steps to make it better. What is a credit score? It was created by the Fair Isaac Corp. as a way to assess individuals' personal credit risk and to help lenders decide if it's wise to loan someone money. The higher the score, the better you look as a credit risk.

What do the numbers mean?
800 to 850: exceptional
740 to 799: very good
670 to 739: good (this is the median of the credit score range)
580 to 669: below average
579 or less: poor

How is your FICO score calculated? You need to understand this so you can take steps to improve your score. explains there are five pieces that go into the equation.

1. Payment history: 35 percent
Do you pay your debts on time? This is the most important factor in computing a FICO score.

2. Amount of debt: 30 percent
This is the amount of money you owe in relation to the amount of credit available. That is, someone who has a credit card limit of $5,000 and has reached that level in charges would have a lower credit score than someone who owes $20,000 but has a credit limit of $50,000.

3. Length of credit history: 15 percent
Generally speaking, the longer your credit history, the higher your score.

4. New credit: 10 percent
Be wary of opening several new credit accounts in a short period of time. This could indicate you are a greater risk for lenders and lower your score, something that is particularly true if you have a short credit history.

5. Credit mix: 10 percent
It's not only credit cards that go into your credit score computation. Other types of credit are included, such as retail accounts, finance company accounts and mortgages.


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