Improve your credit score post holiday splurge with these tips

On the other hand, a low score can lead to higher interest rates and less favorable loan terms.

Understanding Credit Scores

A credit score is calculated based on your payment history, credit utilization, length of credit history, credit mix, and new credit inquiries. The most widely used credit scoring model is the FICO score, which ranges from 300 to 850.

FICO is the most widely used model, accounting for about 90% of all credit scoring.

Understanding the FICO Credit Score

The FICO credit score is a three-digit number that ranges from 300 to 850. It is calculated based on the information in your credit report, which includes:

Payment history (35% of the score)

Credit utilization (30% of the score)

Length of credit history (15% of the score)

Credit mix (10% of the score)

New credit (10% of the score)

How FICO Scores Are Calculated

The FICO scoring model uses a complex algorithm to calculate your score. Here’s a simplified breakdown of how it works:

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Payment history: The model looks at your payment history, including late payments, accounts sent to collections, and bankruptcies. Credit utilization: The model calculates your credit utilization ratio, which is the amount of credit you’re using compared to your available credit. Length of credit history: The model looks at the age of your oldest account, the average age of all your accounts, and the length of time since you last opened a new account.

The Myth of the “Credit Card Balance”

Many people believe that carrying a small balance on their credit cards is a bad thing, but this is not necessarily true. The key is understanding the difference between carrying a balance and paying the bill in full.