Credit Score - 5 Factors Used to Calculate
Your credit score can force you to pay thousands of dollars or save you thousands of dollars a year. It is a three digit number that has a huge influence on your life.
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.
You would assume the credit bureaus would want people to have a good credit score. However the credit bureaus customers are the lenders. It is in the lenders interest for the borrower to have damaged credit. This way they can charge higher interest rates and earn a bigger profit.
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 you have a credit card that is always at the limit then this will hurt your score. But if you can make big payments on this account it can help your score.
Negative items fall into this category. You should remove any negative items. This is accomplished by settling the debt or disputing the accuracy or validity of the item.
You should first try and dispute the mark and if that is unsuccessful then make arrangements to settle the debt. However make sure to get the creator of the negative mark to remove the negative item from your report in exchange for your payment. I suggest to getting this agreement in writing.
2. Ratio of Credit to Debt (30%)
This is how much credit is available to you that is not being used. Is your credit card at the credit limit?
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 Credit Lines (10%)
How often are you creating new accounts using your credit? If it looks like you are frequently trying to buy things using your credit it could cause your score to go down.
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.
Credit bureaus know that your credit will be checked.
Just try to avoid making a lot of purchases using your credit. There are people that switch phone plans and buy cars multiple times in a year and this will hurt your score.
4. Credit Experience (10%)
You should not worry about impacting this factor. It simply shows what type of purchases you have made.
Meaning is your credit used to finance a mortgage, student loans, credit cards, auto loans, and etcetera. The more diverse your purchases the better however this factor will not make or break your credit score. Thus don't worry about this factor.
5. Length of Credit (10%)
How long have you been using your credit? Did you just get your first credit card?
You should not worry about this factor. Individuals that are new to using their credit can still have a good score.
In sum, only worry about the first two factors listed. However for your own knowledge the other three are looked at when your score is calculated.
If you take care of the first two factors then your score will be high. With a high score you can take advantage of rewards, automatic approval and save thousands with low interest rates.
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.
You would assume the credit bureaus would want people to have a good credit score. However the credit bureaus customers are the lenders. It is in the lenders interest for the borrower to have damaged credit. This way they can charge higher interest rates and earn a bigger profit.
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 you have a credit card that is always at the limit then this will hurt your score. But if you can make big payments on this account it can help your score.
Negative items fall into this category. You should remove any negative items. This is accomplished by settling the debt or disputing the accuracy or validity of the item.
You should first try and dispute the mark and if that is unsuccessful then make arrangements to settle the debt. However make sure to get the creator of the negative mark to remove the negative item from your report in exchange for your payment. I suggest to getting this agreement in writing.
2. Ratio of Credit to Debt (30%)
This is how much credit is available to you that is not being used. Is your credit card at the credit limit?
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 Credit Lines (10%)
How often are you creating new accounts using your credit? If it looks like you are frequently trying to buy things using your credit it could cause your score to go down.
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.
Credit bureaus know that your credit will be checked.
Just try to avoid making a lot of purchases using your credit. There are people that switch phone plans and buy cars multiple times in a year and this will hurt your score.
4. Credit Experience (10%)
You should not worry about impacting this factor. It simply shows what type of purchases you have made.
Meaning is your credit used to finance a mortgage, student loans, credit cards, auto loans, and etcetera. The more diverse your purchases the better however this factor will not make or break your credit score. Thus don't worry about this factor.
5. Length of Credit (10%)
How long have you been using your credit? Did you just get your first credit card?
You should not worry about this factor. Individuals that are new to using their credit can still have a good score.
In sum, only worry about the first two factors listed. However for your own knowledge the other three are looked at when your score is calculated.
If you take care of the first two factors then your score will be high. With a high score you can take advantage of rewards, automatic approval and save thousands with low interest rates.
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