What is the credit score based on?
For a score that plays such a huge role in our lives. From the interest rate to whether or not we'll pay on loans, many of us don't fully understand what goes into our credit scores.
It can help to think of our credit score as a pie, cut into five pieces. But not all five pieces are the same size. Some weigh more than others. Here's How Each Piece Plays To Your Credit Score.
The biggest piece of the credit pie is payment history (35%). Every month, your creditors report to the "big three" credit reporting agencies -- TransUnion, Equifax and Experian.
They let the reporting agencies know whether you have repaid your loan on time and in full. If your payment is late or you miss it completely, they report it to the reporting agencies.
A slightly smaller piece of the pie is called the "amount owed" (30%). When you apply for a new loan, creditors want to make sure you don't overextend what you already have.
Length of credit history (15%) Simply put, the longer you've had credit and the more bills you've been paying, the better the creditor will feel about your ability to handle the new debt.
Another thing that creditors want to know is that you can handle all types of debt. The more diverse your credit mix (10%), the higher this part of your score.
When you apply for a new credit card, your credit score is also included in the calculation of the number of times you have applied for new credit (10%).
How do personal loans work?