What Makes Up Your Credit Score?

In today's world, your credit rating can truly make or break you. It's vitally important that you protect and "groom" this credit frequently to make sure that you have the best credit rating you possibly can and I'm going to tell you what information you need to know so that can happen.

Your credit score can save you or cost you thousands of dollars on a home loan or hundreds on a car loan of the life of that particular loan. It can cost you hundreds or thousands on the life of a credit card too so we need to know what we can do to basically get the best interest rate possible; and you do that by having a great credit history. So, what sorts of things are getting looked at and what can you do to maximize that rating of yours? One of the most important things to keep in mind about your Credit rating is this...there are several important factors that go into what makes your credit great or not so great. Let's look at your Balance information first.

If your balances are at $0.00 on a credit card that's good right? Wrong! Wrong! Wrong! It's better than being "over the limit" by far, but it doesn't help you at all and can actually hurt you in most cases. Reason why? What are you showing the credit companies about you? Are you showing them you can be responsible? Are you showing them you can be trusted with the "use/pay" cycle? Not at all. Most of the time, they just believe that you have come into some money and paid it off. What they actually want to see is that you can have a balance and use it responsibly and always make your payments on time. For instance, let's say you had a card with $1000 as a balance. What they want to see is a balance of around $300 or less but no higher than 30% of the available credit. Along with this, make sure you are making your payments on time. Going by the rule of 30% and payments being made on time, you will maximize the worth of any credit card you have. Now let's look at what to do with the actual History.

What I mean by History is the amount of time that you have had credit. You probably, or shouldn't have started a "credit history" until 18 years of age at the earliest. At the point you first establish a credit account of some sort, you've started a credit history. That history means a great deal to the people who will evaluate your credit worthiness. Why? It shows how long you've been able to manage your credit without things like being sent to collections, having accounts close without your consent, etc. So why is this good to know? Because most people think that if they have a ton of credit accounts, the best way to help their credit is to pay down to zero, which was discussed as bad above, and close accounts. That's actually horrible. Let's say you have 3 cards: Card one you've had for 12 years, Card two for 7 and card three for 2 years. If you were looking at closing some of these and you decide that to close your 12 year old account, you just decreased your "credit experience" by 5 years because now your oldest is 7 years old. So, remember, to never close the oldest cards because that's your "history" in credit history.

Another major area is your debt to income ratio. This one is pretty easy to understand. If your debt (monthly payments) are more than what you bring in and can afford, you're in trouble and your credit will drop. Again, 30% isn't considered too much so keep it around there. Some people here ask this question: So why shouldn't I keep things at zero? Because, if you were sitting there with say five cards that totaled a credit amount of $20,000 and they were all at zero. First, you aren't showing me your ability to handle things responsibly. Secondly, what they look at is this...You're going for a mortgage. They see your payments would be $900 a month but uh oh; you could run up a credit balance of $20,000 in one day if you chose to so that is a credit risk. In this situation, you might want to close the youngest accounts to decrease that $20,000 but rotate a small balance on the others to boost your credit.

I hope this article has been helpful to point out the biggest and often times most misunderstood aspects of credit ratings to you. If you'll keep things in mind, as well as the obvious stuff like paying your bill on time, don't have people run your credit non-stop, etc. you'll have great credit in no time!