Sunday, April 11, 2010

What impacts your credit score?

Your credit score can vary dramatically. Each year it's possible to ask the three scoring companies (Experian, Equifax, and TransUnion) what your report is (not your score), however, sadly it's a trade secret what exactly the formulas are that calculate and determine what your score turns out to be.

From my research, there are 5 categories on which your score is determined: payment history (35%), types of credit used (30%), amount owed (15%), how long or your length of history (10%), and your new credit (10%). There are, of course, other factors like your public records, which include bankruptcy, foreclosure and judgments; all of these things stay on your report for the next 7 years (Hint: Try to avoid them!).

Payment History - 35% - This is simple, pay your bills on time and you'll do fine here! These bills you can typically paid in full or the minimum and as long as you pay the minimum you'll be okay here. But who wants to pay just the minimum, you'll never get out of debt doing it that way! If you are late in payments, there is definitely a difference in a bill that's 60 days late versus 90 days, so get them all current and paid!

Type of credit used - 30% - Fair Isaac Company, or FICO, like to see a variety of credit, this includes credit cards, loans (car, student & mortgages all fall into here) and consumer finance accounts i.e. credit cards.

Amount Owed - 15% - This is where having high limits will come in handy, you'll want to show a low debt used to available credit here. So although you may never go and use that $10,000 limit, having it will come in handy here especially if you come close to your limit each month

Length of credit history - 10% - If you're constantly closing cards because you never use them, you might want to keep your oldest card. The longer you've been using credit the better your score will be here.

New Credit - 10% - If you constantly open credit cards to get discounts at stores that will show here. Each of these credit cards will affect your score along with all of the inquiries made. Preapporoved offers are usually soft inquiries, which will not change your score; only the hard inquiries will affect your score, which they have to ask you for your permission (read the fine print!).

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