Your credit report shows detailed information about how you use credit, how much credit you have, the available credit your using, payment history and if any of your loans are in collections.
In your report you have a credit score. That number is used by lending institutions, banks, finance companies and loan departments to measure your credit worthiness.
All the credit scoring categories are used mathematically based on your credit report to come up with you credit score.
You can have different credit scores based on the reporting agency. The 3 major reporting agencies, TransUnion, Equifax, Experion most likely will all have different scores for you.
Based on your scores, they are used by companies to help make decisions about approving you for loans, credit cards, vehicles or home mortgages.
The higher your score, the better of your chance for being approved! Also, your income and expenses, or debt to income ratio is a factor as well.
The credit scale goes between 300-850 points.
If your goal is to get a good credit score, or to keep a good credit score you have to maintain the same habits. Here is what you must do!
Make sure you make on time payments and do not ever be late. Banks are not forgiving late payments anymore and will raise your interest rate at the first chance they get. It will take from 6-12 months before you can get a lower interest rate again and it will never go back to where it was originally. So, if you’re one day late you will be penalized for 6-12 months and it will never reset back to where it was before.
- Get a copy of your credit report and make sure all the information is correct. One piece of bad information can ruin your chance of having good credit score.
- Keep your credit line under 30% or less. When you use all or most of your credit line it decreases your score, lessons your chances for new credit and can raise your interest rates.
If you could only focus on one thing I would say, PAY YOUR BILLS ON TIME! This alone makes up 35% of your credit score.
The best way to make on time payments is to set up an automatic payment schedule with your bank. This will unsure all your payments are never late and nothing negative will happen to your account.
- Try to make more than your minimum payments with auto-pay
- Keep enough funds in your checking account to cover the payment
Once you have this set up or have a system in place to allow you to keep your payments on time, you will need to work on KEEPING YOUR AVAILABLE CREDIT LINE UNDER 30% AND LESS.
This also makes up 30% of your credit score. Between your on time payments and credit line usage makes up 65% of your credit score.
The scoring system will evaluate how much of each available credit line you currently use. The closer you get towards your credit limit can have multiple negative affects to your score. Including increase interest rate, difficulty to receive new credit and repaying back the monthly payment.
Tip: Closing credit card accounts, applying for a lot of credit cards at the same time and having too many creditors can/will lower your credit score also.
Tip2: When applying for a new loan like a car or home. Make sure not to apply for credit cards or anything until your loan clears and you have a closed on that loan first. This can affect your score negatively right before you try to close on a big loan and possibly kill the deal for you.
Your credit history is the next big factor of your credit score. This makes up for 15% of your total credit score. When you include this to the other two factors, it will make up for 80% of your credit score.
The longer you have credit history on an account, the better for you. This helps to insure a new creditor that you are reliable, experience with having credit and paying it back and making you a good risk for them.
The other 20% of your score is based on new credit lines 10% and different types of credit lines for the last 10% to equal the full 100% score.
- New credit line or new inquires do make a small hit on your score temporally.
- Different types of credit lines will let creditors know you can handle a diversity of different types of loans.
To insure the best credit score success, make sure to get your free copy from 3 credit reporting agencies at www.annualcreditreport.com
How your credit score is determined
The number ranges from 300 to 850. Although the exact formula for calculating the score is proprietary information and owned by Fair Isaac, here’s an approximate breakdown of how it is determined:
- 35 percent of the score is based on your payment history. This makes sense since one of the primary reasons a lender wants to see the score is to find out if (and how promptly) you pay your bills. The score is affected by how many bills have been paid late, how many were sent out for collection and any bankruptcies. When these things happened also comes into play. The more recent, the worse it will be for your overall score.
- 30 percent of the score is based on outstanding debt. How much do you owe on car or home loans? How many credit cards do you have that are at their credit limits? The more cards you have at their limits, the lower your score will be. The rule of thumb is to keep your card balances at 25 percent or less of their limits.
- 15 percent of the score is based on the length of time you’ve had credit. The longer you’ve had established credit, the better it is for your overall credit score. Why? Because more information about your past payment history gives a more accurate prediction of your future actions.
- 10 percent of the score is based on new credit. Opening new credit accounts will negatively affect your score for a short time. This category also penalizes hard inquiries on your credit in the past year. Hard inquiries are those you’ve given lenders permission for, as opposed to soft inquiries, which include looking at your own score and have no effect on the score. However, the score interprets several hard inquiries within a short amount of time as one to account for the way people shop around for the best deals on a loan.
- 10 percent of the score is based on the types of credit you currently have. It will help your score to show that you have had experience with several different kinds of credit accounts, such as revolving credit accounts and installment loans.
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