Written By: Stella Walker
So you’ve received a free credit report and now you’re doing your best to understand what exactly it’s all about. You’re looking through the report, maybe you’re a little confused or excited, and you have plenty of questions running through your head: How did they calculate your score? What goes into making that calculation? Why does this have to be so complicated?
Despite the fact that credit scores might seem complicated, they really are rather simple to understand once you get a good handle on how the scoring system works. The scoring system makes use of five factors when it puts together your credit score.
Perhaps the most important factor that helps determine your credit score is your payment history. If you have a poor payment history, such as outstanding balances or late payments, these factors can have a negative effect on how the credit bureaus score your credit history report. For example, payments on a car or mortgage or credit card will show up on this score, so be sure to make these payments in a timely manner. After all, about 35% of your credit score is determined by your payment history.
Debt is usually a bad thing to have, though in certain cases it is necessary if we want to purchase certain expensive things, like houses and cars. The trick, then, is to keep these kinds of debts as minimal as possible, and to keep your balance to credit limit low. For example, if your credit limit on a card is $20,000, then you balance should be no more than $1,500. Make sure you keep an eye on your outstanding debts, because this factor is worth about 30% of your credit score.
Credit History Length
The length of time you’ve had a credit history also affects your credit score; in fact, it’s about 15% of your total score. If you’ve managed your accounts well for a period of time, then your score will definitely improve. Of course, if you don’t have a credit history, you could also have trouble getting a good score, so you’ll want to develop a good credit history over time by making careful purchases on credit.
Types of Credit
In addition to having a good credit history that has lasted for some time, you should also work to develop a variety of different kinds of credit on your record. This demonstrates to other credit bureaus that you can handle numerous responsibilities when it comes to keeping up with your payments. This aspect of the score is worth about 10% of the overall report.
Recent Credit Searches
Finally, your score will be determined by how often you search for credit within a short amount of time. This might seem like an odd factor; however, credit bureaus will look at this as evidence that you’re having trouble finding credit if you have to look often within a short amount of time. Certainly, there are some credit searches that won’t go against your score, such as those carried out by prospective employers. This factor is worth about 10% of your score.
This post was contributed by Stella Walker.