How is a Credit Score Determined
Your credit score determines the likelihood that a given lender will provide you with credit, making your credit score very important. This number is based on your credit history and gives the lender an idea of how safe you are as an investment. Understanding your credit score will allow you to work at improving it, making you pose less of a risk to lenders in the future.
Payment History
Your payment history determines 35 percent of your credit score, making it the most heavily weighed factor in your score. If you pay your bills when due, you will receive a high score in this aspect. If you have been to collections, have filed for bankruptcy or are frequently late with your payments, it will have a negative impact on your credit score. More recent late payments have a larger influence than late payments in years past.
Level of Debt
The second most important thing regarding your credit score is your level of debt. If you have credit cards that are consistently close to your maximum credit limit, your credit score will drop. Your debt level determines 30 percent of your overall credit score, making it best to keep the balances on your credit cards as low as possible. If 30 percent of your total available credit is in use, it looks bad on your credit report.
Length of Your Credit History
The longer you’ve held credit, the better this section will look on your score. For this reason, leaving your accounts open for a long time will reflect positively on your score. Lenders look for patterns. Lenders are more likely to give you the loan that you need if they see that you’ve held a solid credit rating for a long time. This section accounts for 15 percent of your total credit score.
Mixtures of Credit
Having various types of credit plays a significant role in your credit score. Having a credit card, a mortgage and a line of credit would look good on this section since all of these are different types of credit for which you can apply. This section is really only important if you have no other information on your account as it counts for 10 percent of your overall credit score.
Number of Inquiries
Any time a lender pulls your credit score, it shows up on your credit report. Individual inquiries are not generally a bad thing, too many inquiries, on the other hand, signals that you are applying for many different types of credit and, perhaps, not receiving them. Filling out too many applications is generally a considered red flag for lenders as it can mean that you’re on too much debt. This section counts for 10 percent of your credit score, but these inquires are only counted on an annual basis.
Improving Your Credit
If you have an understanding of how credit scores are calculated, you will know what to do when it comes to repairing your own credit. As long as you keep your balances low and make your monthly payments, you will be able to quickly improve your credit rating. Managing your credit will take some effort, but it increases your purchasing power greatly making your effort well worth your while.