Your credit scores are calculated through complex and secret formulas that reward you for good credit usage and penalize you for mistakes and signs of weakness. We have gathered the information from public sources and combined our own research to show you how your actions can affect your credit scores, both positively and negatively.
How Credit Scores are Calculated
You can still find out what factors are most important for calculating your credit score, since the general guidelines are provided by Fair Isaac Corporation. While the percentages may vary depending on the actual credit records reported to your credit history, this guide can help you understand which components of your credit history are having the greatest impact on your credit scores.
Review this Guide to How Credit Scores are Calculated in order to see where you should place the most emphasis on your own credit maintenance. Once you know what goes into calculating a credit score, it will help you adjust the way you maintain your own credit accounts to maximize your credit scores.
Impact of Your Actions
There are many outcomes that can result from even the smallest credit decisions. One mistake can cost you bigtime, while other seemingly positive developments may not help your scores the way that you expect.
Positive Impacts–These are examples of actions that can have positive impacts on your credit scores:
- Seasoned trade lines–Maintain open credit accounts for many years, even if you rarely use them.
- Exceed minimum payment requirements to accelerate repayment and improve credit.
- Maintain a major credit card account while repaying an installment loan in full to create a good mix of accounts.
- Reduce revolving debt to below 10% of credit limits to improve your credit utilization rate.
- Establish perfect payment histories for accounts by paying amounts early and automating recurring payments such as paying installments on loans through scheduled bank drafts.
Negative Impacts–These are some of the actions that can cause a drop in your credit scores:
- Missing a payment or paying late can cause immediate drops in your credit and reduce scores for 7 years.
- Attempting to open several credit accounts can create several hard inquiries that can reduce your credit scores.
- Failing to meet payment obligations on utilities, fines or even rent and medical bills can create negative collection records on your credit reports.
- Maxing out credit card balances can cause a dramatic drop in credit scores.
- Utilizing non-traditional lending–Even a perfect payment history on a finance company loan may lower your credit score slightly.
- Public records, such as judgments, foreclosures, bankruptcies and tax liens can reduce your scores.
- Closing credit accounts while owing on other unsecured credit accounts can reduce your credit scores.
If you are unsure about what impact your choice might have on your credit scores, seek help from an Accredited Financial Counselor. A reputable nonprofit credit counseling organization will have highly-trained and knowledgeable counselors that can help you understand your choices and make the right move.
