The Factors that Determine a Credit Score
Sunday, August 14th, 2011A credit score is a number between 300-850 that is used by lenders, merchants, and credit card companies to determine your line of credit, your interest rate, and other important financial information. Your FICO (Fair Isaac Company) credit score is the one used by 90% of banks, and is considered to be the most important credit score. The higher your FICO credit score number, the better.
Your credit score is influenced by several factors, the most important of which is paying your bills on time. 35% of your credit score is based on whether or not you pay your bills on time; failure to pay at least the minimum on even one bill will affect your credit negatively. Opening lines of credit and paying them off in full can positively affect this aspect of your credit score, while missing payments or allowing accounts to become delinquent will negatively affect your score.
The second most significant part of your credit score is the disparity between your balance owed on accounts and your total credit limit. Several factors go toward determining this percentage of your score including but not limited to: the types of accounts on which you carry a balance, the number of accounts you owe debts on, and the total of your balance across all of your accounts. Lenders will be unimpressed with individuals who owe more than 50% of their credit limit to a particular company. People who have multiple credit cards that carry high balances will have an even lower credit score.
Next, it is important to know that the total time-span of your credit history accounts for 15% of your credit score. Lenders see individual with lengthy credit histories as a safer investment. Canceling credit cards that are paid off is actually harmful to your score due to the importance of length of credit history. The length of credit history is likely to affect young people the most; if you have no credit history to speak of, then it’s duration becomes more important.
Finally, the last 20% of your score is based on the number of new accounts you have opened recently and the diversity of the accounts you possess. Each of these factors counts equally; that is, they account for 10% each of your over all credit score. The way to have the most positive effect on your score in these instances is to open new accounts slowly, but to open a variety of accounts. You should have a credit card, a retail card (like Sears, or Macy’s), and a loan paid in installments each month, but you should not try to start all three of them at the same time.
Understanding your credit score and credit history can be difficult. If you pay attention to the factors covered above, understanding it won’t be an issue. Your score will be higher if you pay your bills on time, keep your balance owed to less than 50% of your credit limit, and have a variety of accounts.
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