Credit Score Meaning - 5 Factors the Bureaus Use
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 credit bureaus use an equation to calculate your score. They do not release this equation to the public. They are scared that people will use that information to improve their 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.
These are the five influencing factors on your score. You will also find approximately how much each factor impacts your score.
1. Payment History (40%)
This is the most important. Your credit report shows your balance, your payment history, your credit limit and the minimum payment.
If your credit card is constantly maxed out, then your score will be lower. However if you can make hefty payments on your balance this 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 suggest trying to dispute the listing first. If the listing is verified then settle with the lender and in exchange for your payment get them to agree in writing to remove the negative listing from your credit report.
2. Ratio of Debt to Available Credit (30%)
In other words how much credit do you have that is not being used? Are all your credit cards maxed out?
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 Lines of Credit. (10%)
How often is your credit run? If it looks like you are constantly having your credit checked your score will be lowered.
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.
The credit bureaus expect to see some inquires for your report.
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.
Meaning is your credit used to finance a mortgage, student loans, credit cards, auto loans, and etcetera. The more diverse your purchases the better however this factor will not make or break your credit score. Thus don’t worry about this factor.
5. Length of Credit (10%)
How long have you been using your credit? Did you just get your first credit card?
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, only worry about the first two factors listed. However for your own knowledge the other three are looked at when your score is calculated.
If you make sure the first two factors are good then your credit score will be good. With a good score you will receive the benefit of getting automatic approval, low interest, and rewards for using your credit.
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