We are always hearing about our credit score, it is this it is that, it is high, or to low. It is a real important number to know, and knowing it is half the battle, if you know how it is calculated, you can actively take part in how your score can grow for the better. Your credit score is used in many instances, most commonly is in borrowing money or getting a loan, but did you know that employers will look at it when deciding on hiring someone, or that land lords look at in in rental situations or even in insurance rate quotes.
[Read: How Can a Person Reach an 800+ Credit Score?]
Factors to Consider With Your Credit Score
- Know Your Score
- Know Where to Find Your Score
- Know How it is Calculated
- Know How to Raise It
You should know where to locate your score, and the three places are Experian, TransUnion and Equifax, you should pull each of these reports every year. You are entitled to one free credit report from each bureau each year. The most important factor is to know how your score is calculated, and lastly how to raise that score from where it is now.
It may seem obvious, but it is often the most misunderstood factor. Accounting for 35% of your score, is this history of what and when you have made your payments. It is a great indicator of how you will pay any new bill, the history of the old bills, and this is why it carries such a great weight. It includes the obvious, the house and the car, but can include the utilities and cell phone bills, and even these days medical bills. So make sure, even if you are making a minimum payment, to pay it on time before the due date.
Debt You Owe
Debt you owe in comparison to the amount you can borrow accounts for another 30% of your score, so if you are “maxed out” on your revolving accounts or credit lines this will impact your score quite a bit, to the tune of 1/3rd of your calculation. This would be a great place to improve your credit score by implementing a pay down of your debt strategy. Paying down your debt, and paying it one time account for 65% of your score, so you can actually kill two birds with one stone so to speak, pay a little more on each bill, and pay it on time and you can see your score improve quickly.
A person does not start out with a perfect credit score, and go down from there, unfortunately that is not how it works, look at number one and two above, but if you begin early enough and establish yourself with some debt, you can quickly improve your score over time. In fact, to the contrary, you start out with no score according to savvyoncredit.com you have to build it and make it grow positively. This is about 15% of your score.
Having to much new credit is not good either, amounting to much open accounts could signal that you are short on cash, or in a bad situation financially. But what is to much, that is left to interpretation, because just because you have open lines does not necessarily mean you are in financial trouble, it could be that you have a lot of extra income and that you are getting more credit, this may be why this only amounts to about 10% of your score.
Having Mixed Type of Debt
Lets say, all your credit is on revolving cards, and no house or car, or other forms of credit, this could be a red flag, as it may indicate that you are using cards to sustain yourself, but with a healthy mix it can show a variety of monthly payments to different sources. This accounts for 10% of your credit score.
[Read: 7 ways to create and improve personal credit score]
Make the Right Choices
As you can see, there are many complex factors that go into a credit score, and they are arguably this order of importance; payment history, how much you owe, your overall credit history, new credit and having a good mix of debt, these comprise of your credit score in a whole, if taken into consideration while you are addressing your accounts and your amount of debt they can assist you when analyzing your debt and credit picture, and where you would need to focus on when deciding to correct your score. Keep in mind, that whatever you choose that you make your payments on time, because regardless of your other intentions, the monthly payments will come due, and your ability to pay is one of the largest portions of the score, making them on time, you can then focus on the rest as your situation unfolds.