Monitoring your credit score has become more and more important in today’s world, helping you make decisions on when to make big purchases as well as safeguarding you against identity theft. To some, the process through which those scores are calculated can seem nearly occult. It is true that none of the three major credit bureaus share their exact formulas for arriving at credit scores, any more than Google shares their formula for search results. However, we do know, roughly, what impacts those scores.
At 35% of your overall credit score, payment history remains the largest factor. If you pay your bills on time, every time, and don’t leave anything unpaid then you’ve got a good chance at maintaining a decent score, even in the face of other factors. Conversely, any of these items can drop your credit score like a rock. Even a simple library fine can make your score plummet if it winds up in a collection agency and on your credit report.
The amount you owe makes up 30% of your score. This is also the portion creditors look at when they begin trying to calculate your debt-to-income ratio, another important figure that helps them determine how big a risk you are. Owing too much can drop your credit score significantly even if you’ve paid on time—which is why a strong payer might well see their score isn’t quite as high as it could be.
Length of Credit History
The longer your credit file has been opened and positive the better your score will be. This is why people who have never had credit can have a hard time getting apartments or taking out loans. Fortunately there are still plenty of lenders who don’t take this as a particular negative. There are even some places that take this as a positive. The length of credit history only accounts for 15% of your overall score.
New Credit Accounts
A bunch of brand new credit accounts opened in a very short period of time can send a bad message to lenders, making them wonder if you aren’t just opening up lines of credit left and right that you never intend to pay off. The “newness” factor of your credit accounts, and how many of these accounts there are, affects 10% of your score.
Types of Credit Used
Lenders want to see “diverse, non-repetitive” credit. If they see one house loan, one car loan, one student loan, one Visa card and one Kohl’s card, for example, you’ve got a mix of credit that will make sense to them. It’s credit that looks reasonable: more reasonable, say, than 5 different credit cards, 3 retail store cards, and 1 student loan.
Jon is a writer for www.SafeIdentityProtection.com where you can find helpful advice on keeping your personal information safe with identity protection.
- The Credit Score Scale: The Best Friend You Ever Had (debt-consolidation-2u.com)
- How To Own a House with Bad Credit (2010taxes.org)