Understanding Your Credit Score

Understanding your credit score, and the formula used to determine that score, can seem like trying to decipher Egyptian Hieroglyphics. However, it does not have to be. Although complex mathematical formulas are used by the three major credit reporting bureaus to come up with your score, it can be broken down into relatively simple terms.

It's important to know your credit score, and understand how to improve it. Your credit score is not only used by bank to gauge your credit worthiness, it's also used by potential employers, cell phone companies, landlords, and others. So, there are plenty of reasons to want to know your credit score and want to improve it.

(In a previous article I wrote about how to get a free copy of your credit report - one from each of the three major credit reporting bureaus; Equifax, Experian and TransUnion. While these credit reports won't give you your credit score, you should be checking your credit reports for errors which could adversely affect your credits score. You can read the article at http://www.associatedcontent.com/article/700049/get_your_credit_report_for_free_really.html)

What Makes Up your Credit Score?

35% of your credit score is based on your payment history. Basically this means are you paying on time, or are you paying late? And if you're paying late, how late you're paying your bills (30, 60, 90 or more days). The best thing you can do to improve your score is pay your bills on time. This is the single most important factor in determining your credit score.

30% of your credit score is based on how much credit you have extended to you. Creditors may use this information to determine your credit worthiness. If they see others are willing to extend credit, then they might be more apt to do so.

15% of your credit score is affected by the length of your credit history. The longer you're had and account with a lender, the better. Length shows that you can maintain a long-term financial relationship. Many people make the mistake of closing accounts they've had for years once they pay them off. For any account you're had for more than three years, even if you pay it off, you should keep the account open to show length.

10% of your credit score is based on how much new debt you've taken on in the past 12-18 months. Lenders get nervous when they see an applicant whose applied for, or gotten several new accounts recently. Even if you're turned down for credit, in most cases, it's noted on your credit report that you applied. Too much recent debt is not a good thing because lenders fear that you may be opening a lot of new accounts because you plan on defaulting on all your accounts. Apply for new credit cautiously.

10% of your credit score is based on the types of credit you have. Lenders like to see a mix of credit; installment loans, financial company loans, and credit card loans (revolving credit). Some types of credit can raise your score, such as installment loans, while too much of another type of credit such as financial company loans and revolving can lower your score. The trick here is to find the right balance of types of credit.

Source: Lending Solutions, Inc.