Know How Credit Scores are Figured to Help your Credit
August 27th, 2010 by Ronnica Rothe
If you’re looking to improve your credit, you first need to understand how credit scores are calculated. You may know that the scores range from 300 to 850 and you may be aiming for a score above 700, but how do you get there?
While the formulas are a secret, the elements of the FICO score are made public. The largest portion of your credit score is payment history, accounting for 35% of your credit score. The fewer times you’ve ever been late and the longer it has been since those late payments, the better.
So the number one thing you can do to improve your credit score is to pay your bills on time, month after month. If you’re not currently caught up, get caught up.
Another major factor that goes into your credit score is how much you owe. This accounts for another 30% of your score. Not only does this consider how much you owe, but the amount of your credit lines you are using. The smaller the balances, the better. If the amount you owe is at or near 80% of your credit limit, you are considered maxed out. After you’ve gotten caught up on your bills, the next thing to work on is getting the balances lowered. Bonus: this will help you save money as you’ll be paying less interest!
A third major factor is the length of your credit history, which figures for 15% of your credit score. This accounts for how long you’ve had the accounts, and how long it has been since there has been activity on your account. The longer you’ve had your accounts, the better, as you’ve proven your creditworthiness over time. If you have older credit cards that you no longer use, it is often best to keep them open, using them for small purchases a couple of times a year, and then immediately paying them off. Of course, if they have any time of annual fee, it is best to close them.
Of lesser importance are the types of credit you have and the number of newer accounts, each making up 10% of your score. For credit purposes, it is good to have some type of revolving account (credit card) and some type of installment loan (mortgage, car loan) currently or in your recent history. You also want to avoid opening multiple new accounts over a short amount of time.
The more you understand how your credit score is figured, the more you are prepared to improve that score.
This entry was posted on Friday, August 27th, 2010 at 12:15 pm and is filed under Credit Repair, Credit Scores. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
