Your credit score is a three digit number that will have a huge impact on your quality of life. This number can save you money or cost you money in high interest rates and down payments.
The credit bureaus use an equation to calculate your score. They do not release this equation to the public. They are scared that people will use that information to improve their credit score.
We would think the credit bureaus would not have a problem with you making sure your credit was good. However the credit bureaus are not earning money form the consumer. The bureaus customers are lenders. Lenders want applicants to have negative credit on their report because they can then charge a higher interest rate and earn more money.
Below are the five factors the credit bureaus use when calculating your score. You will also find the approximate weight that each factor carries in the equation.
1. Payment History (40%)
This is the most important. Your credit report shows your balance, your payment history, your credit limit and the minimum payment.
If you have a credit card that consistently stays at the limit and you are only paying the minimum, you can assume this is not helping your credit score. However if you can make large payments towards your balance it will give your score a bump.
Negative items fall into this category. You should remove any negative items. This is accomplished by settling the debt or disputing the accuracy or validity of the item.
I suggest trying to dispute the listing first. If the listing is verified then settle with the lender and in exchange for your payment get them to agree in writing to remove the negative listing from your credit report.
2. Ratio of Debt to Available Credit (30%)
This is how much credit is available to you that is not being used. Is your credit card at the credit limit?
Your score can receive a bump if you can show the bureaus that you have available credit. The best method of doing this is by keeping your credit card balance around 10% of the limit. This will help because it shows the bureaus that you use your credit and that it is used responsibly.
3. Pursuit of New Credit Lines (10%)
How often is your credit run? If it looks like you are constantly having your credit checked your score will be lowered.
Your credit report shows how often your credit is run. Thus you should not trade in your automobile every 3 months or constantly make purchases requiring a credit check.
The credit bureaus expect to see some inquires for your report.
Just try to avoid making a lot of purchases using your credit. There are people that switch phone plans and buy cars multiple times in a year and this will hurt your score.
4. Credit Experience (10%)
Do not worry about this factor. It only shows the purchases that you have made using your credit.
Meaning is your credit used to finance a mortgage, student loans, credit cards, auto loans, and etcetera. The more diverse your purchases the better however this factor will not make or break your credit score. Thus don't worry about this factor.
5. Length of Credit (10%)
How long have you been using your credit? Did you just get your first credit card?
This is another factor that you can not influence much and will not make or break your credit. If you are a newbie to the credit world you can still have a very high credit score.
In sum, these five factors are used to calculate your score. You should only worry about the first two factors.
If you make sure the first two factors are good then your credit score will be good. With a good score you will receive the benefit of getting automatic approval, low interest, and rewards for using your credit.
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