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 formula for calculating your credit score is a mathematical equation. This equation is not released to the public out of fear that people will use the information to make sure they have a good credit score.
You would assume the credit bureaus would want people to have a good credit score. However the credit bureaus customers are the lenders. It is in the lenders interest for the borrower to have damaged credit. This way they can charge higher interest rates and earn a bigger profit.
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 holds the most value. Your credit report will report your balances, minimum payments, credit limits and payments received.
If you have a credit card that is always at the limit then this will hurt your score. But if you can make big payments on this account it can help your score.
This is where negative marks are taken into account. You can remove negative marks by disputing the mark with the credit bureau or settling the debt.
I would recommend first disputing the negative item. Then if this is unsuccessful make a settlement agreement with the company that created the negative item. In this agreement you should have the company agree to remove the item from your report in exchange for payment. I recommend getting this agreement in writing.
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?
It will help your credit score if you can show the credit bureaus that you have available credit that is not being used. This is most effectively done by keeping the balance of your credit card at approximately 10% of your credit limit. This means if your limit is $1500 and you consistently keep your balance at $150 then you are showing the bureaus two things. One that you use credit and two that you use it responsibly. This will help your score.
3. Pursuit of New Credit Lines (10%)
How frequently is your credit checked? If it appears that your credit is being checked constantly then your score will be negatively impacted.
It is reflected in your credit report every time someone checks your report. So if you are buying a new car every six months or switching your phone plans it will not help.
Credit bureaus know that your credit will be checked.
Just try to make sure your credit is not being checked on a regular basis. There are people that buy cars and trade them in every three months and switch their phone plans regularly. For those their score will be lowered because of this.
4. Credit Experience (10%)
You should not worry about impacting this factor. It simply shows what type of purchases you have made.
This means what have you used your credit to buy. Do you have a mortgage, a car loan, credit cards, and etcetera? They say the more diverse it is the better, however it does not carry much weight in the equation.
5. Length of Credit (10%)
How long has your credit been used? Have you just recently made your first purchase using your credit?
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 are the 5 factors and their corresponding approximate weight. The first 2 factors are the only factors you should concern yourself with.
If you take care of those, then your credit score will be high and you will experience the benefit of having a high score. Such as automatic approval for almost every purchase, low interest rates and even rewards for using your credit card.
If you would like to make a comment, please fill out the form below.
