What Determines Your Credit Score?

We all know that a good credit score is important, especially if you’re looking to buy a house. But how is your credit score determined? How do you improve your credit score, and what matters the most when it comes to maintaining a good credit score?

Your credit score is made up of five different factors. Generally, a good credit score is in the mid-700s and higher. Here are the factors that determine your credit score in the order of their weight and importance (these are approximations):

35% Payment history. Payments more than 30 days late can negatively affect your score.

30% Amount owed. This doesn’t mean you shouldn’t borrow. But if you’re in a lot of debt, it shows you’re overextended financially. To prevent this category from being a negative factor in your score, make sure you don’t charge over half the limit on all of your credit cards.

15% Length of credit history. A long payment history is important for showing lenders you have paid your bills on time. Don’t cancel old credit cards because that deletes all of your credit history with that card.

10% New credit. Opening numerous accounts in a short amount of time can be seen as risky, particularly if you have a short credit history. Each application for a credit card is an inquiry on your credit report and too many in a short amount of time can negatively affect your overall score.

10% Types of credit in use. Make sure your debt is spread out between different types of loans. For example, it’s better to have some debt in credit cards and the rest in a mortgage, car loan and student loans, than it is to have all of your debt in credit cards.

First, find out what your score is. You are entitled to a free credit report from each of the three credit reporting agencies (Equifax, Experian and TransUnion) once every 12 months. See where you stand. Then decide which of these factors you can change to raise your score.



Source: Murney Associates, Realtors