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All About Your Credit Score
Many people assume that they have good credit as long as they pay your bills on time every month. It may come as a surprise to you, when you are denied credit, have to pay a larger rental or lease deposit, or your insurance rates go up based on your FICO score. To truly understand how this happens, you need to know a few things about your credit and why you may be getting turned down despite your exemplary payment history. Remember these numbers are an approximation, since each credit company scores a little differently. However, they will give you a good idea of where you need to improve, despite your perfect or good payment history.
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Payment History and Credit Score
Your credit score represents much more than just whether you pay your bills on time. Your payment history only accounts for roughly 35% of your total score, so if you pay your bills on time every month, your score will reflect that history. However, good payment affects less than half of your total score. In other words, even if you always pay on time, approximately 2/3 of your credit score points are still up for grabs, and this can be good or bad, depending on a different factors.
Debt to Credit Ratio
Approximately 30% of your credit score is not determined by your payment history, but rather how much credit you are , so if you have maxed out your credit card, for example, even if you are paying the minimum payment exactly on time every month, the fact that you are using 90-100% of your credit will hurt your score. Several tips can help you improve your credit score in this area. The most obvious is to limit the debt you have on credit cards or revolving lines of credit. Mortgages, for example, do not affect this part of your credit score. Avoid taking out new credit cards to give you more free credit, because this will affect another part of your score. If you have available credit on cards you do not use, do not close them until you have paid down your debt. These older, but unused cards can help to improve your score by improving the debt to credit ratio.
Length of Credit History
The length of your credit history plays a small part in your credit score, generally somewhere around 15%. There is little you can do to improve this area. Time, however, is your friend. The longer you have an account open, the more your score improves; therefore, even if you do not use a particular account or credit card, if the account is older and more established, you may wish to keep it active. Newer credit lines will also lower this part of your credit score, so avoid opening lines of credit you do not need.
Inquiries
Simply having someone inquire about your credit may lower your score. The inquiry portion of your credit score counts for approximately 10%. Inquiries into your credit only count if you requested a potential creditor to check your credit, when for example, you apply for a loan or credit card. If you know in advance that you will be applying for a loan or having someone check your credit, do not apply for anything unnecessary to help boost your score. Keep in mind that checking your own credit through sites such as
www.annualcreditreport.com does not affect your score.
Now that you know how your credit score is roughly calculated, use the information to your advantage. After you have pulled your own credit report and checked for errors, avoid applying for credit for at least six months prior to a big purchase-such as a car or mortgage loan. Even if you pay off your credit cards every month, you can also boost your score by not using them the month or so before you take out a loan, even if you pay your balance off every month, the credit card companies often report your statement balance. Potentially, creditors may not realize that you pay the balance off every month, so your debt to credit ratio may be affected. Additionally, keep older accounts open and current to increase the age of your accounts.
Finally, remember that paying your bills on time is important. Even if the payment history only counts 35%, delinquent payments have a drastic impact on whether or not you are offered credit. Remember, a late payment is reflected on your credit report for seven years, even if you close the account.
Published on BankingQuestions.com 5/26/09
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