Credit Score Factors

November 6, 2009

With the tightening of the financial markets, it is becoming more and more important to have excellent credit in order to qualify for the financing you are in need of.  The problem is that many people don’t have a clue as to what makes up their credit score. 

Today we are going to take a look at what comprises your credit score, and break it down in detail.

Payment history - 35%

This takes a look at how you pay your bills.  It is the largest of the credit score factors, and recent payment history is weighted the most.  A recent 30 day late can cost 50 or more points, while a 30 day late from 2 years ago will cost you much less.  Another factor that can cost you 50 or more points is being past due on an account.

Some misconceptions that people have on this payment history part of their credit report is that it is always good to pay off a collection if you are able.  If you pay off a collection that is more than 2 years old, however, this can harm your score!

In addition, derogatory accounts do not always fall off your credit report automatically after 7 years.  More often than not, they must be disputed.

Amounts owed - 30%

This factor takes a look at how you manage your debt.  Taking on new debt will temporarily decrease your score.  In addition, you should keep your balances due below 50% of the total credit line to maintain your credit score.  It is even better if you can keep these balances below 30%.

When trying to improve your score, you should not consolidate your debt into one card, it should be spread out evenly across all of your credit card accounts.  Going over your credit limit will cause a large penalty, which is another good reason to keep your debt below the 50% mark at all times.

The credit card accounts you have you should keep open.  If you close an account, you will no longer reap the benefits of that account.  In addition, if you don’t use a credit card for 3 months, that account will become unrated.  A good rule of thumb is to use your credit cards a little to maintain your credit report, even if you pay them off in full each month.

Length of history - 15%

This section touches on a point made earlier, to maintain your credit score, it is important to keep your credit cards active.  The longer your account has been active and in good standing, the better it is going to reflect in your credit score.  This is true even if the rate is terrible.  Keep the card instead of cancelling when the rate rises, but don’t carry a balance, or carry a small balance.  Use a high rate card once a month, maybe to buy gas, then pay it off in full.  It keeps the card active, and the longer the history you have with an open card, the more it helps your credit score.

Mix of credit - 10%

It used to be you could add users to your credit cards as authorized users and they would get the benefit of that trade line.  No longer is this the case, and being added as an authorized user will not give you the benefit of that trade line.

Having a mix of credit is best for this portion of your credit score.  Three to five revolving credit cards with established history is best.  In addition, the type of credit card does matter. 

Inquiries - 10%

Inquiries can affect a credit score for a full year.  These inquiries can cost between 2 and 30 points, depending on the current credit score.  Remember, pre-approved credit card offers are not really pre-approved, if you sign up for 20 of these pre-approved credit card offers, don’t be surprised if you find your credit has been pulled 20 times.

Just knowing what makes up a credit score can really help many people manage their credit.  The first step in managing your credit is knowing what is on your report.  Order a report today, or get a free report online.  There is a link at the top of the sidebar to the right for one company that can provide help in this matter.  In addition, you can take a look at our post on how to read your credit report to help you find the information you should be looking at.

Once you know what is on your report, verify the data being reported.  Make sure it is accurate.  If you find inaccurate information, dispute it by sending letters of dispute to the credit bureaus.  You can read our article on disputing credit report errors for more information on how to do this.

By taking control of your credit score, you can position yourself well for the future.  Good luck!

Posted in Your Credit