Components of a Credit Score

The factors on your credit report that are used to determine your credit score are broken down into 5 categories, each with it’s own weight on the equation.

1. payment history (35%)

2. amounts owed (30%)

3. length of credit history (15%)

4. new credit (10%)

5. types of credit used (10%)

Payment History
One of the primary reasons that the scoring system was developed and why lenders still use it is to determine the likelihood that they will be repaid the money you borrow. Therefore, it makes sense that your payment history would be a major factor in your score. This aspect is affected negatively by late payments, accounts sent to collections, and bankruptcies. The live score more recently any of these have occurred, the larger the effect on your score.

Amounts Owed
Outstanding debt is the next most important measure of your ability to pay back your obligations. Having credit cards, owning a home or car, or going to college means you probably have some debt on your record, which is okay. However, this part of your score can be affected by maxing out credit cards, or leaving them open with no activity. To quickly raise your score, pay off cards with the highest interest rate or where you have late payments first. It is good practice to keep credit cards at 25% or less of their balance.

Length of Credit History
The length of your credit history is based on the oldest account in your credit file. For many people this is their first credit card, a student loan, or possibly a car loan or mortgage. The shorter your credit history, the bigger the risk you represent to lenders. You should also be aware, however, that as your credit history gets longer and you have more accounts opening and closing, you are also at a greater risk for having misinformation added to your report.

New Credit
10 percent of the score is based on new accounts. Typically your score will go down for awhile after you have opened up a new line of credit. The major factor of this percentage comes from inquiries. There are two types of inquiries; soft and hard. A soft inquiry does not affect the credit score and usually involves a quick glance at your score. A hard inquiry does lower your credit score and typically is a result of actions initiated by you in an effort to obtain credit. If you open 2 new credit card accounts, take out a private bank loan, and attempt to buy a new car, your score will go down…the good thing is that your score will rebound from these inquiries.

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