April 1, 2013 by myfabfico
Most of us are pretty familiar with the words credit score and what they mean for….almost everything in your life at this point. All the information on your credit report is measured and weighed, and the bureaus assign a score to your report for lenders to use. But most people don’t know what formula is used to ultimately take all of your payment histories, balances, etc. and calculate it into one number.
Each bureau has a slightly different way of determining your score, but they should all be fairly similar. Some factors that weigh into your credit score count more than others:
- Payment history (35%). On-time payments mean a higher score. Late payments, delinquent or overlimit accounts, bankruptcies, and liens will significantly lower your score.
- Debt-to-Credit Ratio (30%). This is also called “revolving utilization” and is specific to your credit card accounts. If your credit limit is at $1,000, creditors don’t want to see you maxing out the entire credit limit. Try to keep your total revolving utilization ratio as low as possible – 30 percent is good but 25 percent is better and if you really want to maximize your credit score, aim to keep your revolving utilization at 10 percent or less. This goes for your total revolving utilization and for each individual credit card. Maxing out your credit lines can lower your score. If you have an excess of available credit, ask your credit issuer to reduce the amount on credit lines you’re not utilizing.
- Length of credit history (15%). This shows how long you have been using credit and how you have managed your finances in the past. The longer your credit history, the better, so avoid closing accounts which have been opened longer, even if you don’t use them.
- New credit accounts and inquiries (10%). This includes accounts you’ve opened recently, and recent inquiries from companies you have applied to for credit. Credit inquiries remain on your credit report for two years but are only factored into your credit score for the first 12 months. The main point to remember is that applying for a lot of credit in a short period of time can lower your score. (I recently learned a lesson in this)
- Diversity of Credit (10%). Having credit cards is a great credit builder, but lenders want to see that you can manage other types of credit as well, such as installment loans and mortgages.
Its fairly difficult to live every moment of your credit life with this these percentages and components in mind. But they are very helpful when setting a strategy for improving your credit. For example, my first line of action to improve my credit were:
1.Pay off any existing judgements that weren’t scheduled to fall off within the next year.
2.Then focus on my payment history of my existing accounts
3.THEN I worked on my utilization and payed my accounts down to under 25% utilization.
Credit Repair strategies aren’t one size fits all because there are unique situations issues that affect everyone, however understanding the make-up of your score and understanding what might be affecting you the most is a great start.
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