Understanding Your Credit Score
Most people refer to FICO credit scores, but you have a different FICO score for each of the three major credit bureaus: Equifax, Experian, and TransUnion. The FICO credit score looks at how much debt you have, how you’ve repaid in the past, and more.
Scores range from 300 to 850 and are made up of the following components:
Payment History
Makes up 35% of your score.
Have you missed payments or defaulted on loans?
Current Debt
Makes up 30% of your score.
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How much do you owe, and are you maxed out?
Length of Credit
Makes up 15% of your score.
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Is credit new to you, or do you have a long history of borrowing and paying it back?
New Credit
Makes up 10% of your score.
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​Have you applied for numerous loans in the recent past?
Types of Credit
Makes up 10% of your score.
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Do you have a healthy mix of different types of debt: auto, home, credit cards, and others?
7 Years
After seven years, most negative items will simply fall off your credit report. You still owe your creditor even when the debt is no longer listed on your credit report. Creditors, lenders, and debt collectors can still use the proper legal channels to collect the debt from you.
Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income.
This number is one-way lenders measure your ability to manage the payments you make every month to repay the money you have borrowed.
To calculate your debt-to-income ratio, you add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out. For example, if you pay $1500 a month for your mortgage and another $100 a month for an auto loan and $400 a month for the rest of your debts, your monthly debt payments are $2,000. ($1500 + $100 + $400 = $2,000.) If your gross monthly income is $6,000, then your debt-to-income ratio is 33 percent ($2,000 is 33% of $6,000).
Evidence from studies of mortgage loans suggest that borrowers with a higher debt-to-income ratio are more likely to run into trouble making monthly payments. 43 percent or under is very important because, in most cases, that is the highest ratio a borrower can have and still get things like mortgages regardless of their credit score.
Unsecured vs. Secured Debts
Loans and other financing methods available to consumers fall under two main categories: secured and unsecured debt. The primary difference between the two is the presence or absence of collateral—that is, backing for the debt, or something to be taken as security against non-repayment.
Unsecured Debt
Unsecured debt has no collateral backing: It requires no security, as its name implies. If the borrower defaults on this type of debt, the lender must initiate a lawsuit to collect what is owed.
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Examples
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Credit Cards
Signature Loans & Personal Loans
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Business loans
Medical Debts
Deficiencies (reposed cars)
Lines of Credit
Secured Debt
Secured debts are those in which the borrower, along with a promise to repay, puts up some asset as surety for the loan. A secured debt instrument simply means that in the event of default, the lender can use the asset to repay the funds it has advanced the borrower.
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Examples
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Mortgages
Student loans (Fed backed loans)
IRS debt
Car Loans
Equity Lines of Credit
Any loan with collateral attached