Understanding Credit Scores

Credit scoring can be difficult to understand at times but try to remember that the score is only made up of five factors summarized below:

 

35% of the score is derived from payment history.

Pay your bills on time, avoid judgments and tax liens and you’ll be okay. The longer someone pays their bills on time the less the credit score will be affected. Time heals this category.

 

30% of the score is derived from balances carried on accounts.

The lower the better, remember that revolving credit card debit is the most significant factor in this area. It is always better to pay off credit cards before an auto or mortgage loan to get the biggest score increase.

 

15% of the score is derived from the average length of time you have had credit.
The longer the length the better. Never close a credit card because you will hurt yourself in this area since your average account age will not increase in the future as quickly. Being added as an “Authorized User” to someone’s older credit card will help a lot in this area. The older the credit card, the better. The card should be at least seven years old or more to make a decent impact in this area.

10% of the score is derived from the mixture of credit you have on your credit report.

To maximize this area you want to have a mortgage, a car loan, and a few credit cards. The magic number of credit cards to have is three, but it is never a good idea to close credit cards to get down to that number. Closing credit cards does more damage that the increase received by having fewer.

10% of the score is derived from the number of times you apply for credit.

There are several types of inquiries but the only kind that hurt your credit score are the ones where you let someone pull your credit in order for you to get approved for a loan of some sort. Even asking for a credit limit increase is considered applying for a loan. Pulling your own credit report online is considered a personal inquiry and does not hurt your credit score. Anytime you receive pre-approved credit offer in the mail is considered what the industry calls a promotional inquiry and will not affect your score either. Lastly, a current creditor of yours looking at your credit report without you asking them too is considered an account review inquiry and has no effect on your credit score.