Credit Score Information – 5 Factors the Bureaus Look At
Your credit score is a three digit number that will have a huge impact on your quality of life. This number can save you money or cost you money in high interest rates and down payments.
The credit bureaus use an equation to calculate your score. They do not release this equation to the public. They are scared that people will use that information to improve their credit score.
We would think the credit bureaus would not have a problem with you making sure your credit was good. However the credit bureaus are not earning money form the consumer. The bureaus customers are lenders. Lenders want applicants to have negative credit on their report because they can then charge a higher interest rate and earn more money.
These are the five influencing factors on your score. You will also find approximately how much each factor impacts your score.
1. Payment History (40%)
This is very important. On your credit report it reflects your credit limit, credit balance, minimum payment and payments received.
If your credit card is constantly maxed out, then your score will be lower. However if you can make hefty payments on your balance this can help your score.
This is also where negative listings will be taken into account. You should remove any negative listing on your credit report. This can be done by either disputing the listing with the credit bureau or settling the debt.
I would recommend first disputing the negative item. Then if this is unsuccessful make a settlement agreement with the company that created the negative item. In this agreement you should have the company agree to remove the item from your report in exchange for payment. I recommend getting this agreement in writing.
2. Ratio of Available Credit to Debt (30%)
This means are all your credit cards at their credit limit? How much credit do you have that is not being used?
Your score can receive a bump if you can show the bureaus that you have available credit. The best method of doing this is by keeping your credit card balance around 10% of the limit. This will help because it shows the bureaus that you use your credit and that it is used responsibly.
3. Pursuit of New Lines of Credit. (10%)
How often is your credit run? If it looks like you are constantly having your credit checked your score will be lowered.
Your credit report shows how often your credit is run. Thus you should not trade in your automobile every 3 months or constantly make purchases requiring a credit check.
However the threshold of this varies between credit bureaus. There are a certain number of inquiries that credit bureaus expect to find on your credit report.
Avoid having your credit run many times. There are people that are constantly trying to make purchases with their credit and for those there credit is lowered because of the credit constantly being checked.
4. Credit Experience (10%)
This is not really something you can control or should worry about. It reflects what type of purchases you have made.
This means what have you used your credit to buy. Do you have a mortgage, a car loan, credit cards, and etcetera? They say the more diverse it is the better, however it does not carry much weight in the equation.
5. Length of Credit (10%)
How long has your credit been used? Have you just recently made your first purchase using your credit?
You should not worry about this factor. Individuals that are new to using their credit can still have a good score.
In sum, these five factors are used to calculate your score. You should only worry about the first two factors.
If you make sure the first two factors are good then your credit score will be good. With a good score you will receive the benefit of getting automatic approval, low interest, and rewards for using your credit.
Filed under: Management