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These Factors Firmly Decide Your Credit Score Range

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We all know that a good credit history is essential for a variety of financial activities, but many people have the same question: How is a credit score calculated? A variety of factors are used to determine your credit score, and by understanding what is used to make this calculation you can be proactive in ensuring that your score stays high.

Payment History

Payment history plays a major role in the calculation of your overall credit score. A variety of account types will be considered when examining payment history. These include:

  • Credit cards (MasterCard, Visa, Discover, American Express, etc.)
  • Installment loans (loans in which you make regular payments, such as a car loan)
  • Retail accounts (such as credit cards from department stores)
  • Mortgage loans
  • Accounts from finance companies

Late payments can be detrimental to your credit score, but the good news is that most creditors don’t report late payments that are only a few days past their due date. Likely if your payment is fewer than 30 days tardy it will not be reported to national credit bureaus. However, when they are over 30 days late, you can expect that they will be included on your credit report. Payments are categorized by how late they are. The more delinquent a payment, the greater the effect it will have on your credit score. Those categorizations include the following:

  • 30 days
  • 60 days
  • 90 days
  • 120 days
  • 150 days
  • Charge-off

Public Records

Certain matters of public record can also have an adverse affect on your credit score, and while they are not always avoidable, it is important to be aware of this fact. These can include bankruptcies, tax liens, and civil judgments, and your score may be affected simply by the presence of these records, regardless of whether or not they have been paid. These records can stay on your report for up to ten years depending on the type of record, but they will have less of an affect on your score as time goes on.

Credit History Length

In terms of your credit score, approximately 15% of your overall score is based on your credit history length. Credit history length is divided into three pieces:

  • How long your accounts have been open
  • How long certain types of accounts have been open
  • The length of time since you last used your open accounts

To generate a FICO score, you need to have a minimum of six months of credit history on one or more credit accounts. There will also need to be a minimum of one undisputed account that has been reported to a credit reporting agency in the past six months. In terms of how credit scores are determined, the formula will evaluate and examine your account ages from oldest to newest along with your overall average account age.

New Accounts

One of the other major credit score factors is new accounts. Your credit score will examine the number of new accounts that you have by account type. It may also examine how many of the accounts you have open are new accounts. It is important that you don’t open multiple new accounts around the same time, as this can lower the average age of your accounts, and this can have a negative effect on your overall score.

In certain cases, opening a new credit account can help to improve your overall credit score. If you refrain from making purchases on these cards, your overall utilization of credit can drop. This can ultimately increase your credit score.

Credit Inquiries

If you are concerned about what affects your credit score you should also consider credit inquiries. When you go through the process of applying for credit, you then authorize lenders to ask for your credit report this is known as a hard inquiry. In general, an inquiry will have a relatively small impact on an individual’s overall score, and it will likely reduce the score by fewer than five points.

Accounts in Use

When considering the question of how are credit scores calculated, accounts in use should also be examined. This activity is thought to make up around 10% of your overall credit score. If you have too many accounts open, this can result in a negative impact on your overall credit score regardless of whether you are actually using the accounts.

However, closing your accounts is not always the best option. Before you close any of your accounts, you should evaluate the number of accounts that you currently have open, their cost to you, and how you use them. Your credit reports will give you an idea of the account status on each account. A good credit mixture is important for a high credit score. It is important to remember that accounts that you have had open for a long time, especially those with low balances and high credit limits, can positively affect your credit score.

Credit Utilization

Your balance to limit ratio is what determines your credit utilization rate.  To find out what that ratio is you add up all your outstanding balances, then add up your total credit limits for each account.  Next you divide your balances by your total limits.  If you close accounts it can cause a higher credit utilization ratio since your total balance will be a higher percentage of your available credit limit.  This is viewed by creditors as a sign of risk.  In general your credit utilization ratio should be no more than 30% or your available credit limits.

Do you know what’s in your credit report?  If not you should, errors in your report could be costly.  Consider public information which could have you mixed up with another.  It’s your credit and no one should know better than you if the information contained within is accurate.  In addition a credit report can show you not only who has been looking into your credit but it can be a tool to use to improve your credit credibility.  If you haven’t checked your report lately put it on your to do list and then make sure to do it.

The post These Factors Firmly Decide Your Credit Score Range appeared first on Credit Data.


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