Credit Scores 101

So we see day after day all diffrent types of articles about credit scores. This is one thing most people know very little about. Why you might ask? Well the banks and other powers that be feel this is for the best. So let get down to the basics of what the credit score is first.

The credit score is how you are rated as a consumer. The score is determined by a number of diffrent caculations. To put it the most basic way it adds up the number of accounts open, how long the accounts have been open, debt to income ratio and the pay history on each account. The score is then placed out there for banks and companies to look. Your score could range any where from the low 200's to the high 800's. I personally have never seen a score lower then 200 but I sure there might be some out there.

Now that we know the basics of the credit score let give an example of how you might come up with a score. You have the following loan and credit cards open...

One car loan out for 15,000.00 you have never been late loan has been paid on for 1 year
Credit card 1 has a balance of 400.00 you have been late 2 times and has been opened 2 years
Credit card 2 has a balance of 500.00 you have never been late and been opened 5 years

So based on this information above lets break this down. First you have never had any other loans or credit cards in the past. I pull your credit report and see these three things, from there we need to see how much you make ; I see you make 25,00 dollars a year. Next how much do you owe 15,900.00 total. How much are your payments on these balances let say 300.00 a month. Based on what you make and what you pay your debt to income is less then 40% . This means good news for your credit score. By your debt to income ratio low it improves your score.

Now let's look at how long these accounts have been open. The loan just has been opened one year not a whole lot of pay history but it is enough time to count as being established. An account is established after 12 months of pay history. You have a credit account opened for 2 years great for credit history. And last I see the credit account that has been opened for 5 years this is excellent. All of these are reporting as established this will help your credit score.

Now the last part the pay history . You have 3 accounts and two with no payments missed. These accounts will help your score since there is excellent pay history. However you have missed two payments with in the last year on one account this will hurt your score. So how much will it hurt ?? A LOT ! Why you might ask? This is where it gets more complex. You have only three credit account this is why. With having just a few accounts being past due will hurt more then someone with 30 years of history and 20 accounts. This can impact your score 50 points or more. I would say this person would have about a 650-670 score when if they would not have been past due it would have been in the 700 range.

So what this means to you is higher apr's on loans or credit cards. This is just one small part of the credit score I will be talking about check back for more post about credit scores.