Credit Report Score 101
When it comes to applying for home loans or many other types of credit accounts, your credit score can have a huge impact on your ability to get qualified for the credit. For many people, understanding what makes up your credit score is not easily understood. There are several factors in your credit score and knowing how each factor affects your score will give you a better understanding of how to manage your credit. If you manage your credit correctly, you will get the highest possible score which will give you the ability to get qualified for financing like an auto loan or mortgage.
What is NOT in Your Score?
First off, there are certain factors that are not part of your credit score calculation. They include your employment information, occupation, salary, race, color, sex, marital status plus much more. Keep in mind that the only thing that goes into the calculation of your score is actual credit information.
What Can Affect My Score?
Your credit score is a snapshot of your credit profile at that moment in time. The credit factors that go into calculating your score are amounts owed, payment history, length of credit history, types of credit used and new credit.
This is obvious, but payment history makes up about 35% of your score. Missing a payment has a huge impact on your credit score, so it is crucial to pay all credit accounts on time. If you are currently late on any debts, you want to get those accounts current as soon as possible. The credit bureaus give the highest weight to payment history over the last 24 months.
There are many people who pay their debts on time and still have a low score because they have high balances on credit accounts like a credit card. The balances on accounts make up about 30% of your credit score. In order to increase your score, you want to pay down on your credit card accounts and maintain the balances as low as possible.
Length of Credit History
Length of credit refers to how long an account has been open. The longer the account has been open, the higher your score will be. Credit history makes up about 15% of your score. This is why it is so important to not close out any accounts as this could lower your score, even if you never use the account. By closing out the account, you will lose the history of that account when it comes to calculating your credit score.
Anytime you open a new account, your score will drop until the account begins to have some credit history. New accounts only make up about 10% of your score, so you will not see a large drop in your score on a new account, but opening several accounts at one time will greatly affect your score. You should only open a new account if you really need too.
Types of Credit Used
It is crucial to have good credit accounts on your report. Avoid finance company loans or accounts that have 90 day or 12 months same-as-cash accounts. Mortgage loans, installment loans and revolving credit cards impact your score more favorably than finance company accounts. This makes up about 10% of your credit score.
Understanding what factors make up your credit score should strongly help you manage your credit so that you can get the best possible score.