A credit score, or FICO score which is the most common used scoring system, analyzes for lenders the likelihood of you defaulting on a loan. The scoring system uses information collected from the three credit bureaus, TransUnion, Equifax, and Experian. The scoring system ranges from 300 to 850, with the average score being 723 (according to myFico.com). Your data is analyzed based on the following criteria to achieve a score.
1. Payment history: 35%
2. Amounts owed: 30%
3. Length of credit history: 15%
4. New credit: 10%
5. Types of credit use: 10%
First, your payment history is the most important part of your credit score. This information is typically reported by 30, 60, and 90 day late payments with 90 days being the most derogatory. If you’re only late on one account it will not affect your score as negatively as if you’re late on several accounts.
If you want to achieve the highest score possible, never be late on any payments.
Each credit card company and lender reports this payment history information to the credit bureaus at different times of the year so your information may vary among the bureaus. Check for any inaccurate information on your yearly credit report and report them to each bureau, which are required to fix them in 30 days after an investigation. Also, keep an eye on all your account statements because some credit card companies can raise your interest rate or drop your available credit if you are late on a payment, even if it’s not to their company.
Negotiate for lower interest rates if you’ve never live score had a late payment.
Second, the amount you owe on your accounts in relation to your credit availability will be the next important factor on your score.
Most experts recommend you carry balances of less than 30% of your available credit.
This means if you have a credit card with $1000 credit limit don’t carry a balance higher than $300 on the closing date of each month. In general, a good tip is to keep your balance around 0-30% of your limit and if possible pay off your balances once or twice a month if possible.
Third, the next factors are the length of your credit history and new credit.
Generally, the older your accounts are with a good payment history the higher your score will be.
Those with the highest scores (in the 800s) have had credit for at least ten years, usually around 15-20 years.
Unfortunately, credit bureaus average this information among all your accounts so new accounts can really hurt your credit score, particularly when you’re younger. Even if you don’t open new accounts, even shopping for credit with lenders pulling your score at a car dealership, bank, or retail store called “inquiries”, can hurt your credit score because you look risky because you “need” credit.
Finally, the types of credit you have will affect about 10% of your score.
Most experts recommend only have 2-3 major credit cards and an installment loan (car or school) or real estate loan.
Open too many credit cards and you look risky, mainly because of the high interest rate on the cards and you lack of diversification. Don’t panic if you have many cards open, just pay down your balances and let them collect age to help your score. If you are worried about using them, cut them up or cancel them only if you are at risk of identity theft. The available credit on these cards in relation to the credit used on your other cards (debt to credit available ratio) will increase your score.