How your Credit Score is calculated is the great mystery for many, but here we break it down and answer “What does all this mean?”
1 – Payment history (35%) – This is how often you pay on time. Pay a bill late, this is dropping your score 35%.
2 – Amounts owed (30%) – Think debt to limit ratio on this one – How high are the balances on your accounts when compared to the credit limit? We advise you to keep your balances at 30% or below of the credit limit. Ideally in the 10% range.
3 – Length of credit history (15%) – This is how long you’ve had accounts open. NEVER close an account. The greater the length of time you can show that you have good credit behaviors the better.
4- New Credit (10%)- This is credit inquiries or applications for new credit (car shopping, credit cards, home buying). Do this too much – your score will drop 10%.
5- Types of credit used (10%) – This one is pretty straight forward – this means that you have a variety of credit accounts open. A installment loan, a mortgage, a revolving card, and a student loan vs. all credit card accounts.
If you have point number 1 & 2 under control – then you really should take a look at the bottom 3 factors. #3 Length of Credit History – you need time, so there really is not an immediate way for this to affect your score. Just stay current, and don’t close accounts. Over time you will see a reward here. #4 New credit – this is an easy one to get under control. Most people look at their credit score in preparation for a major purchase. Until you have reached your goal – any other applications for credit are unnecessary. So until you’ve reached your score goal- don’t apply for any lines of credit.