Credit Scores are one of the biggest factors directing the lives of consumers. It is the one number that can determine how much companies trust a borrower, customer, or even potential employee. It is important to understand how credit scores are established in order to be in a position to direct the path of any decisions determined by that number.
Bad Credit Listings – Negative credit listings will bring your credit score down which is why staying current on your accounts is so important.
Revolving Credit Debt – the more of your credit that you have utilized then the lower your credit score will be. Creditors have determined that higher debt proportioned to credit limits on rotating accounts means that consumers are likely to default on the debts.
Age of Accounts – the older the credit line the more that consumer has a proven ability to manage funds. Anything that has been opened in the last three years is untested and likely to push down the credit score.
Numbers of Open Accounts – Creditors like to see that there are a number of open accounts. It is very similar to the idea that older accounts show a more stable consumer. The magic number of open accounts seems to be between 6 and 10.
Type of Accounts – not just any credit account is good. Creditors want to see the “choice” accounts. Credit that carries a high interest rate can cause the score to drop.
Inquires – the more people that you open your credit report to then the lower your credit score is going to drop. Any inquiry that you authorized will be a hit to your credit score. The exception to the rule is similar inquires (like for a mortgage) in a one month period are considered just one inquiry.
The goal is to reach a credit score that is above 720 or more. Consumers at this level of credit score receive the best offers from companies (including no interest credit lines). FICO scores are drawn by percentages from five different areas.
Payment History (equals 35% of the FICO score) - paying on time every time will do more to pull up your credit score that most everything else that you can do.
Amount Owed (equals 30% of the FICO score) - The credit score is determined by how much is owed on accounts compared to how much credit is actually available on those accounts. The higher the debt to credit ration then the lower the points for this area. It is one of the easiest things to adjust in order to help raise your credit score.
Credit History (equals 15% of the FICO score) - This is the length of time that different accounts have been opened. Only time can help improve this part of the score.
New Credit (equals 10% of the FICO score) - A large number of new accounts opened over a short period of time can throw up a flag to lenders. The only way to help your score here is to limit the number of accounts that you open.
Types of Credit (also equals 10% of the FICO score) - It is important to mix up the accounts. Having six to ten credit card accounts is not as beneficial as having a mortgage, credit card, car loan, and other fixed loans. Lenders like seeing a balance of fixed and rotating credit accounts.
Developing a high credit score is not always easy but it is not impossible. The most important step is to understand how the credit score is established. Learning the things that are evaluated and the weight given to them will help you know what to attack and how aggressive to be to help increase your credit score.
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