• What are the Components of a Credit Score?



    Today is the best time for Canadians to monitor their credit scores. It could give you a $1,000 savings a year in interest payments. During the year 1956, an engineer and a mathematician created a system for interpreting business data to assist institutions make effective monetary decisions. The system known as FICO, immediately transformed into a scoring criteria that are utilized by lenders and investors to estimate the risk involved with loaning money to companies and consumers.

    How to Calculate the Credit Score



    • The financial data is obtained about your previous and current credit habits.
    • The data is then calculated into a credit score.
    • When correct payments are done based on you credit card terms, the score will increase. The credit scores range from 300-900; with the higher number as the better credit rating. Hence, a typical Canadian has a 720 credit score.

    If you maintain prompt with your payments, you can obtain higher credit limits at lower interest rates since you have shown that you are trustworthy. If you haven’t had an experience with a credit card or loan, you will basically have no credit score. This will eventually make it hard for you to obtain a credit.

    Five Components that Construct your Credit Score (according to Fico.ca)



    1. History of Payments. This constitutes to 35 percent of the credit score. It is according on how good you pay off your debts. Each moment you miss a bill or settle late payments, your score will decrease. Any chief financial happenings in your life like declaring bankruptcy, actions done by collecting agencies, previous due payments and foreclosures will be filed in your payment history.
    2. Overall debt. This takes the 30 percent of your total credit score. This is the sum of the entire credit card debt, loans, mortgages and other debts you may have and the duration it took you to settle it. If you immediately pay all your credit card debts, this will lower down your total debt and increase your score. The proportion between the amount of credit left when compared with the amount you have used will at the same time have an impact on your credit score.
    3. Credit history. This involves 15 percent of your credit score, and is decided by the duration of time you have utilized your credit services such as how long you have had credit cards, loans and mortgages. If you close your previous credit card account which you have maintained for years, then begin with a new one, this shortens your history and can be unfavorable to your credit score.
    4. Latest credit is the sum a lender allows for you to borrow, and accounts for 10 percent of your total score. After you are accepted for a credit card or loan, the recent credit number will be changed according to the changes.
    5. Credit types take part the last 10 percent of your credit score. Big loans like mortgages have a bigger change on this number than a line of credit or a credit card.

    See Also



    Who Monitors Your Credit Score and Why is It Important?

    Making Your Credit Score an Excellent One

    6 Ways to Make Your Credit Score a Better One

    External Links



    Banking.about.com

    Consumerismcommentary.com

    Creditcardguide.com



 
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2 Comments
On Mar 9, 2011, Alex Hung Said:
I am also amazed as to how the credit score manipulates the trust factor.Also more ironic is the no credit no trust factor!
In case you have managed your life with borrowing money, you have scored a zero and so if ever needed of a loan you are denied
of it.This stands as a drawback in gauging one's potential of handling debt.Perhaps, a person who made no loans in his life was clever
in managing his funds, hence such a person could also be careful with his creditors.The negative aspect might be rare though.

I also appreciate the author who has shown us how the credit score is calculated and the various factor that determines one's reputation.
On Mar 6, 2011, Broker Said:
It's amazing how you can get a great credit score and then just by getting large debt your score will drop and nobody will give you a good loan. Once you pay it off, magically everyone wants to give you money again.
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