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How a good credit score is calculated by FICO

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People often ask – What is good credit score? In simple words, a good credit score is something that makes you ‘credible’ in the business. Lender use credit score to decide to grant loans to their customers and their credit limits. A good credit score can save your money and lower your interest rates. A credit score of 700 or above is considered good with a range between 300-850. Different lenders define good credit score differently according to the size of organization.

What is Credit Score: A credit score is a statistical method to determine the likelihood of an individual paying back their money he or she has borrowed. A good credit score involves low risk for lenders and investors and the business itself.

How credit score is calculated

FICO score is the measure that is mostly used by lender to determine the risk involved in particular loan. FICO score is created by Fair Isaac Corp. Fair Issac does not reveal exact formula I uses. It operates within the range of 300 to 850 within that range, there are different categories which are :

  • Good credit score, how to calculate and Improve credit scoreExcellent Credit Score: 750+
  • Good Credit Score:700-749
  • Fair Credit Score: 650-699
  • Poor credit Score: 600-649
  • Bad Credit Score: below 600

What makes up your Credit Score

When you borrow money, your lender sends information to credit bureau in the form of Credit report from the information in the credit report, bureau determines credit score based on five major factors. These factors include in credit score calculation, They are not given equal weighting.

35% – Previous credit Performance
30% – Current level of indebtedness
15% – Time credit has been in use
15% – Types of Credit Available
5% – Pursuit of New Credit

These factors are positive for you then you get a good credit score. You can also improve these to get good scores. You can’t assume that your score is good if you met the obligation on time. Your credit rating is checked. You can get your credit score free at Credit.com . This information is provided to you at no cost with your consent.

How Your Credit Score Affect Your Mortgage

How individual with varying credit score will pay dramatically different interest rate on similar mortgage amount. Your credit score affect your mortgage in many ways like.

Score Rate Monthly payment
720-850 5.49% $ 851
700-719 5.61% $862
675-699 6.15% $914
620-674 7.30% $1028
560-619 8.53% $1157

Good credit score gives you leverage to negotiate a low interest rate on your credit card or a new loan. It makes your credit card limit increased. You have more negotiating power. Therefore,To make good credit score you have to maintain low level of indebtedness having a long credit history, make bills payment on times.

(With inputs from Shaweta Narang)

Also read: How To Check CIBIL Score

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