Making Sense of Your Credit Score
Anyone with a track record of garnering credit or obtaining a loan
has a credit
report – and a credit score.
Your credit score tracks your borrowing, charging, and debt
payment history. It's pretty cut-and-dried. A high credit score
places you within easier (and cheaper) reach of your financial
goals, like owning a home or buying a new car. A lousy credit score
means you may not be approved for the loans and credit needed for
such items, or if you are approved, you'll likely pay more money in
interest to obtain that credit.
Based on your credit history, especially in how it compares to
others, your credit score is designed to forecast your likelihood of
paying back debt if financial institutions extend you credit.
Your credit score is based on five key categories contained
within your credit reports (as follows):
- Payment History: Accounts for roughly 35%
of your score. This one is pretty self-explanatory, paying your
bills on time will help keep your scores high, while late payments,
charge-offs, and collections will hurt. If you're trying to improve
your credit rating, avoid the later at all costs. And while this
category makes up the largest single chunk of your scores, it's
important to understand that 65% of your score is determined by
other factors. Meaning that there's more to it than simply making
your payments on time. Let's take a look at the other categories...
- Amounts Currently Owed: 30% of your score
is based on the amount of debt you're currently carrying –or
more specifically, the amount of money you currently owe your
creditors. While this category looks at the total amount that you
owe (credit cards,
home loans, car loans, etc.), it's the credit cards –or
revolving accounts – that have the most impact on your credit
score. In order to maximize your scores in this section, you should
keep your balances in relation to your credit limits as low as
- Length of Credit History: Consisting of
roughly 15% of your score, this category specifically measures
looks at how long you've had credit. It does so by reviewing all of
your accounts and looking at the opened dates. Obviously, the
longer you've had credit, the more points you'll earn in this
section. This is just one of the reasons why it's not a good idea
to close old, good accounts. Why would you want to lose the good credit history?
- Types of Credit: Worth 10% of the points
in your credit score, this section is looking for a healthy mix of
accounts. Diversity is key – having a mix of different types
of accounts including credit cards, auto loans, mortgage loans,
etc., will insure you do well here.
- Searches for New Credit: This section
accounts for 10% of your score. Basically, when you apply for
credit an inquiry will post to your credit report showing that
you're seeking credit. Having too many inquiries in a short period
of time can hurt you. As a general rule of thumb, try to avoid
excessively shopping for credit – only open a new credit
account when you really need it. (Tidbit: By law inquiries remain
in your credit reports for two years. However, only inquiries in
the last 12 months are considered in your credit score
Your credit score is essentially your "credit report card" on how you've managed your financial
obligations – for good or for bad.
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