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What is a credit score and how is it calculated?

A credit score is a numerical representation of a person’s creditworthiness. It is calculated using an algorithm that takes into account various factors such as credit history, payment behavior, credit utilization, length of credit history, types of credit, and recent inquiries.

The most commonly used credit score is the FICO score, which ranges from 300 to 850. The higher the credit score, the better the creditworthiness.

Here is a breakdown of how a FICO score is calculated and the weight of each factor:

1. Payment history (35%): This includes your record of making payments on time and any missed or late payments.

2. Credit utilization (30%): This is the amount of credit you are currently using compared to the amount you have available. It should be kept below 30% to maintain a good credit score.

3. Length of credit history (15%): This considers how long you have had credit accounts and the average age of all your credit accounts.

4. Credit mix (10%): This refers to the variety of credit accounts you have such as credit cards, loans, and mortgages.

5. Recent credit inquiries (10%): Every time you apply for credit, it is recorded as an inquiry. Too many recent inquiries can lower your credit score.