What Affects Your Credit Score

Credit Score. Even the phrase leaves people somewhat guarded, embarrassed, or confused. In basic terms, a credit score is a three digit number between 300 and 850 generated by a mathematical formula. This formula takes into account your previous payment history and amount of credit outstanding, among other important details we’ll cover shortly.

This score is used by financial institutions to estimate risk on potential customers. The higher the credit score, the lower the perceived risk to the financial institutions. Currently the FICO (Fair Isaac Corporation) Score is the most popular with approximately 90 percent of all financial institutions in the U.S. using a borrower’s FICO score in their decision-making process.

5 Main Credit Score Determination Factors

35% Payment History

This portion includes your previous payment information, past and current delinquency and public records.

Here are some tips for keeping a healthy payment history:

• Paying bills on time weighs heavily in calculation
• If you missed, get current, stay current – old scores don’t haunt you forever
• Avoid going to collections -even if you pay off a collection account it will stay on your record for 7 years
• If in trouble, don’t wait to contact creditors – they are more likely/able to help the earlier you get in contact with them

30% Amounts Owed

Total amounts owed across all balances.

• Maintain low balances on credit cards and all revolving credit lines
• Pay off debt as opposed to moving it around – consolidating debt to one card may reduce interest amount short term, but may not benefit your score
• Opening more credit cards to increase your credit limit may backfire – although more available credit may sound like it should help with your score, often opening more cards can appear suspicious to agencies

15% Length of Credit History

How long ago you opened your accounts, and how long has it been since your last activity on those accounts.

• Don’t open too many new accounts too quickly – new accounts lower average age of accounts

10% Types of Credit Used

The mix of credit types across all accounts: revolving, installment, etc.

• Apply for new types only when needed – opening more just for the sake of variety probably wont improve your score
• Maintain credit cards, but use them wisely – someone with no credit history historically is more risky than someone with history of paying properly
• Closing an account doesn’t make it go away – it still will appear on your record and perhaps influence your score for some time

10% New Credit

The pursuit of new credit, inquiries, etc.

• Don’t take out too many cards too quickly – rapid credit accumulation can appear risky to lenders
• Limit inquiries into your credit score, as each inquiry can affect it

Things to Do Now

1) Obtain your current credit report at least once per year - Every American can check their credit report free of charge at annualcreditreport.com. When reviewing the report, check for errors. Make sure there are no incorrectly stated late payments or other discrepancies. If you do find errors, immediately call to dispute them with the appropriate credit bureau and reporting agencies.

2) Set payment reminders - Most financial institutions offer payment reminders in the form of email, text message, or even voice call. Set these up on all accounts possible. Since, on time payments constitute the major part of your credit score, this will ensure you keep track, and keep the score in tact.

3) Reduce total debt - Refrain from using credit cards for everyday purchases. Grocery shopping, gas, clothing are things often thrown on the credit card, however can build up. These purchases should be able to be made with a debit card or cash. Any available budget beyond this should be put towards paying down the current outstanding debt, starting with the card with the highest interest rate.

Whether you’re looking to apply for a credit card, auto loan or mortgage; it’s important to understand your current consumer credit score what factors are contributing to it.

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