Ever wonder how your credit score is calculated? Well, it's really not all that complicated. In this article, you will learn the five factors that determine your credit score as well as the weight that each of them carries. These five factors are: payment history, overall account balances, credit history, types of credit and inquiries. After reading this article, you won't be able to calculate your score because there are complex algorithms used to compute your credit score; however, if you can understand the underlying factors that contribute to your credit, then you can learn the best strategies for boosting your score upward.
As obvious as it seems, paying your bills on time is very important. Something as simple as one 30-day late payment can stay on your credit report for 7 years. A late mortgage payment can hold you back from obtaining a loan for a year or mean the difference between a great interest rate and a poor interest rate. Also weighted heavily are collections, charge-offs, judgments and bankruptcies. These types of issues generally affect your credit rating in the most negative way. It is certainly possible to have these issues corrected in time. The important thing is to become knowledgeable about your credit in order to correct these issues as well as prevent them from occurring in the future.
Maintaining low balances contributes to the second largest factor in your credit score. As a good rule of thumb, it is a good idea to owe approximately 10% of your total credit limits. For instance, if you have a $1,000 line of credit, you should maintain a low balance of $100 on any given month. Owing too much money on accounts shows that you are a risk factor and are unable to pay account balances down. Creditors want to deal with consumers who can show restraint and discipline with credit lines. You want to show creditors that you are responsible and will pay them off in time. You don't want to show that you have a high dependence on credit.
Why not just have an open line of credit and keep a balance of $0? While that may seem like a logical and affordable decision to make, it does not establish a payment history over time and thus is not maximizing your ability to push your credit score up. You also don't want to close accounts that you don't use. When you do this, you are lowering your balance to credit limit ratio because you are eliminating available credit limits that were otherwise helping you. To sum things up, it is better to have a $0 balance on an open account rather than closing the account. It is even better to maintain a low balance and make payments each month on an account.
Remember, your payment history contributes to 35% of your credit score, and your balances contribute to 30% of your score. Therefore, maintaining low balances and paying your bills on time each month affects 65% of your credit score.Simply put, the longer your accounts have been opened, the higher your score will become. Accounts that are new may actually bring your score down, especially loans. It is not until you establish a positive history over time that you will notice the positive effects of a score increase.
A healthy mix of different accounts is best. You want your credit report to be comprised of credit cards, mortgages and auto loans. You don't simply want to have credit cards listed on your credit report.When a company pulls your credit report to qualify you for credit, this is called an inquiry. An inquiry will stay on your credit report generally for 3 years. It is very important to limit the amount of inquiries on your credit report. Although inquiries only contribute to 10% of your credit score, too many inquiries in a short period of time makes a consumer appear to be out of money and desperate for credit, and this becomes a risk in the eyes of potential creditors. It also implies to creditors that you may be opening new accounts, which as stated above pushes your credit score down.
A good tip to remember: multiple inquiries in a short period of time are calculated as only one inquiry. This allows consumers to shop around for good interest rates without being penalized. For this reason, it is a good idea to shop around for an auto or mortgage loan within a short period of time, such as two weeks.It is okay to check your own credit, as personal inquiries do not have a negative impact on your credit. Personal inquiries on your credit can't be seen by any creditor as well. The only type of inquiry that affects or contributes to the 10% are those inquiries done by creditors and not your own inquiries.
There is no greater embarrassing moment than the one where you have applied for a loan and it is declined because you have a poor credit score. Such embarrassment is reversible though; there are ways you can get back on the horse so to speak. It is important however to know how you got where you are to know what to do or not to do to avoid falling into the same trap again. As much as you would like to blame it on anyone, a poor credit score is usually borne as a personal responsibility. However, there is always the proverbial light at the end of this especially dark tunnel, here is how:Start from the bottom up,Improving your credit score just like the way everything else begins from the bottom. You need to know how you got there so that you can get out. Consider this as a maze; you have to go back the same way you came to get out of it. When working to improve our credit rating, you have to know what you did wrong so that in future you avoid doing the same thing.
The one and most efficient ways of doing this is to peruse through your credit reports; these are detailed reports of your credit activity over the past year or years depending on the time. Look through it to see what lowered your credit score and work to improve it by not doing such things.Settle any outstanding debts,The report will tell you where you have debts and how much you owe whether credit card payday loans. This information will then help you to reduce these debts by paying them off or at least making arrangements on how to pay them if the debt is not within your ability. The fact that you have started on the payments is an improvement on your credit score.
Avoid credit cards,Warren buffet said that the first step to being rich is getting rid of your credit cards. A credit card is a permanent loan from the lending institution. Whenever you use it, you are charged interest therefore making your purchases convenient but expensive.There is no price tag that can be put on the harm the credit card does to your credit score and this story is true for everyone who has one. Credit cards promote impulse buying and misuse of money that increases your debt and lowers your credit rating. Get rid of your existing ones and cancel any new applications.Dedication carry's the day,Nothing good comes easy but improving your debts is something you should not take lightly. It is not going to be easy, it might call for a lifestyle shift, but just like education, the fruits will be sweet.
[Wealthy Men]
As obvious as it seems, paying your bills on time is very important. Something as simple as one 30-day late payment can stay on your credit report for 7 years. A late mortgage payment can hold you back from obtaining a loan for a year or mean the difference between a great interest rate and a poor interest rate. Also weighted heavily are collections, charge-offs, judgments and bankruptcies. These types of issues generally affect your credit rating in the most negative way. It is certainly possible to have these issues corrected in time. The important thing is to become knowledgeable about your credit in order to correct these issues as well as prevent them from occurring in the future.
Maintaining low balances contributes to the second largest factor in your credit score. As a good rule of thumb, it is a good idea to owe approximately 10% of your total credit limits. For instance, if you have a $1,000 line of credit, you should maintain a low balance of $100 on any given month. Owing too much money on accounts shows that you are a risk factor and are unable to pay account balances down. Creditors want to deal with consumers who can show restraint and discipline with credit lines. You want to show creditors that you are responsible and will pay them off in time. You don't want to show that you have a high dependence on credit.
Why not just have an open line of credit and keep a balance of $0? While that may seem like a logical and affordable decision to make, it does not establish a payment history over time and thus is not maximizing your ability to push your credit score up. You also don't want to close accounts that you don't use. When you do this, you are lowering your balance to credit limit ratio because you are eliminating available credit limits that were otherwise helping you. To sum things up, it is better to have a $0 balance on an open account rather than closing the account. It is even better to maintain a low balance and make payments each month on an account.
Remember, your payment history contributes to 35% of your credit score, and your balances contribute to 30% of your score. Therefore, maintaining low balances and paying your bills on time each month affects 65% of your credit score.Simply put, the longer your accounts have been opened, the higher your score will become. Accounts that are new may actually bring your score down, especially loans. It is not until you establish a positive history over time that you will notice the positive effects of a score increase.
A healthy mix of different accounts is best. You want your credit report to be comprised of credit cards, mortgages and auto loans. You don't simply want to have credit cards listed on your credit report.When a company pulls your credit report to qualify you for credit, this is called an inquiry. An inquiry will stay on your credit report generally for 3 years. It is very important to limit the amount of inquiries on your credit report. Although inquiries only contribute to 10% of your credit score, too many inquiries in a short period of time makes a consumer appear to be out of money and desperate for credit, and this becomes a risk in the eyes of potential creditors. It also implies to creditors that you may be opening new accounts, which as stated above pushes your credit score down.
A good tip to remember: multiple inquiries in a short period of time are calculated as only one inquiry. This allows consumers to shop around for good interest rates without being penalized. For this reason, it is a good idea to shop around for an auto or mortgage loan within a short period of time, such as two weeks.It is okay to check your own credit, as personal inquiries do not have a negative impact on your credit. Personal inquiries on your credit can't be seen by any creditor as well. The only type of inquiry that affects or contributes to the 10% are those inquiries done by creditors and not your own inquiries.
There is no greater embarrassing moment than the one where you have applied for a loan and it is declined because you have a poor credit score. Such embarrassment is reversible though; there are ways you can get back on the horse so to speak. It is important however to know how you got where you are to know what to do or not to do to avoid falling into the same trap again. As much as you would like to blame it on anyone, a poor credit score is usually borne as a personal responsibility. However, there is always the proverbial light at the end of this especially dark tunnel, here is how:Start from the bottom up,Improving your credit score just like the way everything else begins from the bottom. You need to know how you got there so that you can get out. Consider this as a maze; you have to go back the same way you came to get out of it. When working to improve our credit rating, you have to know what you did wrong so that in future you avoid doing the same thing.
The one and most efficient ways of doing this is to peruse through your credit reports; these are detailed reports of your credit activity over the past year or years depending on the time. Look through it to see what lowered your credit score and work to improve it by not doing such things.Settle any outstanding debts,The report will tell you where you have debts and how much you owe whether credit card payday loans. This information will then help you to reduce these debts by paying them off or at least making arrangements on how to pay them if the debt is not within your ability. The fact that you have started on the payments is an improvement on your credit score.
Avoid credit cards,Warren buffet said that the first step to being rich is getting rid of your credit cards. A credit card is a permanent loan from the lending institution. Whenever you use it, you are charged interest therefore making your purchases convenient but expensive.There is no price tag that can be put on the harm the credit card does to your credit score and this story is true for everyone who has one. Credit cards promote impulse buying and misuse of money that increases your debt and lowers your credit rating. Get rid of your existing ones and cancel any new applications.Dedication carry's the day,Nothing good comes easy but improving your debts is something you should not take lightly. It is not going to be easy, it might call for a lifestyle shift, but just like education, the fruits will be sweet.
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