Tuesday, April 9, 2013

Five Factors That Determine Your Credit Score

By Paul H. Gray


Ever wonder how your credit score is calculated? Well, it's really not all that complicated. In this article, you will learn the five factors that determine your credit score as well as the weight that each of them carries. These five factors are: payment history, overall account balances, credit history, types of credit and inquiries. After reading this article, you won't be able to calculate your score because there are complex algorithms used to compute your credit score; however, if you can understand the underlying factors that contribute to your credit, then you can learn the best strategies for boosting your score upward.

Payment history is reviewed to make sure that you don't have any late payments that are more than 30 days past the due date. If you do, and they're recent ones, then your score will drop. If you keep your payment history on time and pay when bills are due, then the number one category will be a major factor in your final score.The second category, available credit, is based upon a percentage of credit available to you compared to current loan balances. For example, if you have a credit card with a $10,000 credit limit and you have a $3,000 balance, you will be rewarded in your credit score. The algorithms seem to indicate that keeping an approximate balance of one-third of your available credit at all times boosts your score. However, if you approach, or worse go above, your credit limit, your scores will fall.

By concentrating on your payment history and available credit, you will have the most impact on your total score overall and you'll find that the remaining three variables will simply fall into place. Pay on time and keep your balances at the correct level is your best bet.When you apply for a loan in order to buy the house or car of your dreams lenders will look at your credit score and they will use it to decide if they should give you the loan or not.There are lots of Americans who don't know what a credit score is or how it is calculated. If you belong to this group of people, then don't worry because in this article you will learn all these basic concepts that are necessary to start improving yours and to buy the house or car of your dreams once and for all!

Why not just have an open line of credit and keep a balance of $0? While that may seem like a logical and affordable decision to make, it does not establish a payment history over time and thus is not maximizing your ability to push your credit score up. You also don't want to close accounts that you don't use. When you do this, you are lowering your balance to credit limit ratio because you are eliminating available credit limits that were otherwise helping you. To sum things up, it is better to have a $0 balance on an open account rather than closing the account. It is even better to maintain a low balance and make payments each month on an account.

Remember, your payment history contributes to 35% of your credit score, and your balances contribute to 30% of your score. Therefore, maintaining low balances and paying your bills on time each month affects 65% of your credit score.Simply put, the longer your accounts have been opened, the higher your score will become. Accounts that are new may actually bring your score down, especially loans. It is not until you establish a positive history over time that you will notice the positive effects of a score increase.

A healthy mix of different accounts is best. You want your credit report to be comprised of credit cards, mortgages and auto loans. You don't simply want to have credit cards listed on your credit report.When a company pulls your credit report to qualify you for credit, this is called an inquiry. An inquiry will stay on your credit report generally for 3 years. It is very important to limit the amount of inquiries on your credit report. Although inquiries only contribute to 10% of your credit score, too many inquiries in a short period of time makes a consumer appear to be out of money and desperate for credit, and this becomes a risk in the eyes of potential creditors. It also implies to creditors that you may be opening new accounts, which as stated above pushes your credit score down.

A good tip to remember: multiple inquiries in a short period of time are calculated as only one inquiry. This allows consumers to shop around for good interest rates without being penalized. For this reason, it is a good idea to shop around for an auto or mortgage loan within a short period of time, such as two weeks.It is okay to check your own credit, as personal inquiries do not have a negative impact on your credit. Personal inquiries on your credit can't be seen by any creditor as well. The only type of inquiry that affects or contributes to the 10% are those inquiries done by creditors and not your own inquiries.

Amounts Owed (30%),Amounts owed represent 30% of your credit score. It refers to the amount of debt you have in comparison to your credit limits. This is also called the "debt to credit ratio" and it works like this:Let's say you have $10,000 available and you only owe $3000, then your ratio is 30%. So the formula for the "debt to credit ratio" is: your debt divided by your available. The lower the ratio, the better for your score,Important: If you have a high ratio, don't apply for more available credit to lower it. It will only hurt your score even more so please don't do that.Credit Length (15%),Credit length represents 15% of your score. The longer your history is the better for your score. This is based on the assumption that your past financial habits are likely to be the same in the future. And if you have a long history, the bureaus can see exactly what your financial behavior is.

New Credit (10%),The application for new credit represents 10% of your credit score. Every time you apply for new credit, an inquiry is added to your credit report. This inquiry hurts your score, because it tells the bureaus that you are in the need for more money.Also, taking new credit will bring down the average length of your credit accounts. This is because now the new credit account is taken into consideration to calculate the average length.Credit Types (10%),The types of credit that you have represent 10% of your score. It's good to have different types of credits because it shows the lenders that you have experience managing different credit accounts.

Avoid credit cards,Warren buffet said that the first step to being rich is getting rid of your credit cards. A credit card is a permanent loan from the lending institution. Whenever you use it, you are charged interest therefore making your purchases convenient but expensive.There is no price tag that can be put on the harm the credit card does to your credit score and this story is true for everyone who has one. Credit cards promote impulse buying and misuse of money that increases your debt and lowers your credit rating. Get rid of your existing ones and cancel any new applications.Dedication carry's the day,Nothing good comes easy but improving your debts is something you should not take lightly. It is not going to be easy, it might call for a lifestyle shift, but just like education, the fruits will be sweet.




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