There are five factors that contribute to determining your credit score:
Payment History
Amount Owed (ratio)
Length of Credit History
Taking on More Debt (Inquiries)
Types of Credit in Use
1. How you pay your bills – Your credit history (35 percent of the score)
This is the most important factor; how you’ve paid your bills in the past. The strongest emphasis is on recent activity (2 years or less.) Paying all your bills on time is good. Paying them late on a consistent basis is not. Few things hurt your score as heavily as past due payments. Having accounts that were sent to collections is even worse. Declaring bankruptcy is worst. Think long and hard before filing for bankruptcy. It most cases, it simply isn’t worth it.
2. Your debt to your available credit ratio (30 percent)
The second most important area is your outstanding debt — how much money you owe on unsecured and secured loans, (Credit cards, car loans, mortgages, home equity lines, etc.). The ratio of available credit to debt (account balance) is an important ratio. Try to keep it below 30%.
Also of importance is the total amount of credit you have available. If you have 10 credit cards that each have $5,000 credit limits, that’s $50,000 of available credit. Statistically, people who have a lot of credit available tend to use it, which makes them a less attractive credit risk.
3. Length of credit history (15 percent)
The third consideration is the length of your credit history. The longer you’ve had credit — particularly if it’s with the same credit issuers — the more points you’ll get.
4. Types/Mix of credit (10 percent)
The best scores will have a mix of both revolving credit, such as credit cards, and installment credit, such as mortgages and car loans. “Statistically, consumers with a richer variety of experiences are better credit risks,” Watts says. “They know how to handle money.”
5. New credit applications – Also called inquiries (10 percent)
The final category is how many credit applications you’re filling out, called intquiries. The scoring model compensates for people who are rate shopping for the best mortgage or car loan rates, but not for revolving type loans, payday loans, etc. The only time shopping really hurts your score is when you have previous recent credit stumbles, such as late payments or bills sent to collections.
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By Blair Warner
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