5 Factors of Your Credit Score

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.

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 is the most important. Your credit report shows your balance, your payment history, your credit limit and the minimum payment.

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.

Negative items fall into this category. You should remove any negative items. This is accomplished by settling the debt or disputing the accuracy or validity of the item.

You should first try and dispute the mark and if that is unsuccessful then make arrangements to settle the debt. However make sure to get the creator of the negative mark to remove the negative item from your report in exchange for your payment. I suggest to getting this agreement in writing.

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?

Your score can receive a bump if you can show the bureaus that you have available credit. The best method of doing this is by keeping your credit card balance around 10% of the limit. This will help because it shows the bureaus that you use your credit and that it is used responsibly.

3. Pursuit of New Lines of Credit. (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.

However the threshold of this varies between credit bureaus. There are a certain number of inquiries that credit bureaus expect to find on your credit 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%)

Do not worry about this factor. It only shows the purchases that you have made using your credit.

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?

Do not worry about this factor. If you are new to the world of credit you can still have a great score.

In sum, these five factors are used to calculate your score. You should only worry about the first two factors.

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.

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