How Credit Scores Are Made

Sat, Jul 10, 2010

Financial Advice

Most people have become more cautious with credit recently, but there are some important uses for borrowing, and the deal you get depends on your credit score. To avoid surprises, it is important to know what factors make up credit scores and how heavily each one is weighed.

History of Paying On Time (35%). The most heavily weighed factor and the most obvious, this means that accounts sent to collection agencies, some late payments, and delinquencies in public records will cost you points on a credit score. Most accurate negative information, however, will not continue to be reported after 7 years.

Amounts Owed (30%). Credit agencies look at not only the total amount you owe, but also the ratio of that amount compared to what credit is available to you. Those who are near the max available on their credit cards are penalized more heavily.

Age of Open Accounts (15%). The amount of time you have had credit accounts open, with the longer history the better for your score.

Frequency of Seeking New Credit (10%). Whenever someone applies for new credit, the lender performs a “hard pull” of their credit history and too many of these in too short a period of time signals to credit agencies that the person is in dire need of money. That leads to lower scores.

Types of Credit Used (10%). This factor looks at the mix of accounts the person has, such as revolving or installment credit lines.

For those actively looking to build or rebuild a positive credit history, these factors outline a clear picture of what to do and not to do. It takes much of the guesswork out of improving your score.

, , , , , , , , , , , , , , , , , , ,

Leave a Reply

CommentLuv badge