Understanding Credit Scores

To be able to effectively manage  and improve your credit score, you need to understand what credit scoring is all about and how it is done. There are many people who leave it to chance and they continue to operate with no idea as to what may hurt their credit score or improve it.

The first thing you need to know is what factors are considered when calculating your score and the impact of each factor on your credit which is good for your financial plan. There are some factors that have more weight than others and it is important to know what really makes a difference. The following five aspects are what is used to calculate your score in percentages. Repayment History is the first and most significant factor which constitutes 35% of your score. The next 30% is on outstanding balances, while the duration of credit history takes up 15%. The types of credit used and new applications each have 10% to bring the grand total to 100%.

From this you can clearly see that your repayment history has the biggest impact when calculating your credit score. This means that you should work to always make your payments on or before time as falling behind can really damage your score. Your outstanding balance is the other significant aspect of your credit. To have a good score here you will be required to avoid maxing out on your credit. If you have credit cards and they are always almost maxed out you will be doing you credit score a disservice.

The last three factors combined are equal in percentage to the repayment history. This does not mean that they should be completely ignored. Make sure that you handle each of these areas competently but lay emphasis where it matters most and that is with the first two factors. If you are able to make timely payments and maintain some reasonable balance on your cards, you will find the last three factors will quite easily fall in place and translate to a higher credit score.

Understanding how the credit scores are calculated and what has more weight will put you in a better financial position and guide you in making financially sound decisions. A poor credit score will normally reduce your chances of getting financing and even where you are able to secure it, you will find yourself paying higher interest as compared to those who have a better score.

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