How Your Credit Score is Calculated

Credit scores are becoming increasingly important, with many employers even factoring this into their hiring decisions.  A credit score is based on a credit report, which is a detailed account of one’s credit history, borrowings, repayments, and credit inquiries.  It indicates the financial responsibility of an individual, including on-time monthly payments, types of credit accrued, and complete credit history.

The three prominent credit bureaus which maintain credit records are TransUnion, Equifax and Experian. Any non-payment is immediately reported to these bureaus and reflected in one’s credit report. A credit score is calculated by a special type of software from Fair Issac Corporation Company, from which the FICO score name stems.

There are several different components, with individual weightings, that comprise your credit score:

Payment History – This accounts for 35% of a credit score and indicates timely payment of monthly bills or otherwise.

Extent of Indebtedness – How much an individual owes constitutes as high as 30% of the total credit score.  Thus, it is important to keep your borrowings low, preferably below 40% of maximum credit limits.

Length of Credit History – How long a person has maintained credit carries a weighting of 15%. The longer the credit history, the better this reflects on your score.

Types of Credit – The composition and different types of credit that a person has comprise 10% of the credit score.

New Credit – The size of new credit and inquiries has a weighting of the remaining 10% on the credit score.

A credit score varies between 350 and 850. While a score of 850 indicates excellent credit, 350 very poorly on the individual’s financial responsibility.  To improve a score, should reduce credit card debt, pay bills in time, and be careful in the types of credit you utilize.

Fixed or Variable Rate?

Purchasing a house may be a daunting task for anyone, especially for first time buyers. One of the complexities involved is to decide between a fixed or variable rate mortgage.  Depending upon the market and your financial expectations, each option provides different benefits and drawbacks.

A fixed rate mortgage has many positive features, such as guaranteed rate of interest, monthly payment certainty, low down payment, few calculations, and easy understandability. Fixed mortgages are controlled mortgages and easy to administer. Because of all these factors, these are popular with first time home purchasers.

On the other hand, fixed mortgages come with high rates of interest and may not be suitable during times of falling interest rates.
Variable mortgages are generally cheaper and result in savings when rates fall.

Studies have shown that there have been more savings with variable rate mortgages, and they are favored by a large number of buyers.

However, variable mortgages require a higher down payment and are unstable. These are difficult to manage, as the monthly payments may fluctuate.  They can also be complex, as there are many types, such as standard, discounted, cash back, and tracker mortgages.

Choosing between the two depends on individual situations and interest rate deals.

An informed decision can be made in consultation with financial professionals.