A:

Your credit score, which is also referred to as your FICO score, is a measure that creditors use to assess your potential credit worthiness. Generally speaking, the higher your credit score, the less of a credit risk borrowers will perceive you to be. If you have a low FICO score, then you could be deemed a higher credit risk. Having a high credit score will help you secure a loan for a car or home, and will also help you get more favorable terms than if you had a lower credit score.

The Fair Isaac Corporation, the creator of the FICO score, does not reveal the exact way in which they arrive at each individual FICO score. The company does, however, detail the different weights they assign to different aspects of a person's financial situation. Your payment history makes up 35% of your FICO score, while your total debt owed amounts to 30% of your final FICO score. Making up the final 15%, 10% and 10% of your FICO score are the length of your credit history, any new credit that you have taken on, and the type of credit you have used.

When calculating your individual FICO score, the number of credit cards that you have will influence the smallest weighted category: the type of credit that you use. Although this is given the least weight in the FICO score calculation, this is not to say that the number of credit cards you have will not be important. The more credit card accounts you have, the more credit you will have available to you. If you were to run up your debt, this could leave you unable to pay for any new loans you agree to. Therefore, if you have fewer credit card accounts, you will have less credit available to you, which will increase your credit score. However, responsibly managing a small number of credit cards can allow you to possess a better credit score compared to someone with no credit cards, because the lack of a consistent payment history is considered to be riskier.

Note: There is a catch in this process; people who tend to carry a balance on their credit cards instead of paying them off every month will have a higher credit rating than those who wisely avoid interest payments. The reason for this is that credit card companies want to make money, and they only make money off of individuals who pay interest. This means that people who can't afford to pay off their accounts in full may end up getting more deeply in debt because their high credit scores allow them to access even higher credit limits and more types of credit.

To learn more about credit, see The Importance of Your Credit Rating and Consumer Credit Report: What's on It.

RELATED FAQS
  1. Will having several credit cards hurt my credit score?

    The manner in which you use your credit cards may affect your credit score more than the number of credit cards you own will. Read Answer >>
  2. What are the biggest factors that can affect my credit score?

    A credit score is a numeric expression that helps lenders estimate the risk of extending credit or loaning money to people. ... Read Answer >>
  3. Does a free credit report show your credit score?

    Find out how you can obtain your credit score, and find out whether your score is included in your free annual credit reports. Read Answer >>
  4. How is my credit score calculated?

    The credit score, commonly referred to as a FICO score, is a proprietary tool created by the Fair Isaac Corporation. This ... Read Answer >>
  5. How can I increase my FICO score?

    Find out about a few simple, consistent ways to improve your credit score, including how to manage your credit card balances ... Read Answer >>
  6. Can a Best Buy credit card help you build credit?

    Learn about how using a Best Buy credit card responsibly can lead to a higher credit score and lower interest rates on mortgages ... Read Answer >>
Related Articles
  1. Credit & Loans

    More Banks Offer Free (Actual) FICO Scores

    Lenders overwhelmingly use the FICO credit score when it comes to determining creditworthiness. And thanks to a new initiative, consumers can see it too.
  2. Credit & Loans

    Is It Worth Paying To Check Your Credit Score?

    Generally, a free credit report is all you need. If you've had some credit issues, it may be worth buying your credit score to get a finer level of detail.
  3. Credit & Loans

    The Importance Of Your Credit Rating

    A great starting point for learning what a credit score is, how it is calculated and why it is so important.
  4. Credit & Loans

    What Do Credit Score Ranges Mean?

    Take a closer look at what credit scores in each range mean for your financial future.
  5. Credit & Loans

    How Bad Is My Credit Score?

    You've seen the number, but what does it mean? Here's how to assess your credit score and get to a better place if needed.
  6. Credit & Loans

    Credit Score vs. Credit Report: Which Is Better?

    They sound alike, but can serve very different ends.
  7. Investing

    How to Raise Your Credit Score Quickly

    Here are the best tips for raising your credit score quickly.
  8. Credit & Loans

    Best Ways To Repair Your Credit Score

    Follow these 6 steps and you'll be on your way to a better credit score.
  9. Credit & Loans

    Which Credit Reporting Sites Can You Trust?

    It can be difficult to determine the best place to find out your credit score. Here are some tips to help you along the way.
  10. Credit & Loans

    How To Boost Your Credit Score To Save Thousands

    One of the first steps you should follow before buying a home is to boost your credit score. And how do you do that? Here, we tell you how.
RELATED TERMS
  1. FICO Score

    A type of credit score that makes up a substantial portion of ...
  2. Credit Mix

    The types of accounts that make up a consumer’s credit report. ...
  3. Credit Scoring

    A statistical analysis performed by lenders and financial institutions ...
  4. Credit Score

    A statistically derived numeric expression of a person's creditworthiness ...
  5. Credit Rating

    An assessment of the creditworthiness of a borrower in general ...
  6. Beacon Score

    A number generated by the Equifax Credit Bureau to rank an individual's ...
Trading Center