Your credit score can force you to pay thousands of dollars or save you thousands of dollars a year. It is a three digit number that has a huge influence on your life.
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.
These are the five influencing factors on your score. You will also find approximately how much each factor impacts your score.
1. Payment History (40%)
This holds the most value. Your credit report will report your balances, minimum payments, credit limits and payments received.
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.
This is where negative marks are taken into account. You can remove negative marks by disputing the mark with the credit bureau or settling the debt.
I suggest trying to dispute the listing first. If the listing is verified then settle with the lender and in exchange for your payment get them to agree in writing to remove the negative listing from your credit report.
2. Ratio of Debt to Available Credit (30%)
This is how much credit is available to you that is not being used. Is your credit card at the credit limit?
If you can show the credit bureaus that you have available credit it will help your score. I suggest keeping a credit card balance at 10% of your limit. This helps because you are showing that you use your credit and you use it responsibly.
3. Pursuit of New Credit (10%)
How often is your credit run? If it looks like you are constantly having your credit checked your score will be lowered.
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.
The credit bureaus expect to see some inquires for your report.
Just try to avoid making a lot of purchases using your credit. There are people that switch phone plans and buy cars multiple times in a year and this will hurt your score.
4. Credit Experience (10%)
You should not worry about impacting this factor. It simply shows what type of purchases you have made.
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 has your credit been in use? Did you just recently make your first purchase with your credit?
You should not worry about this factor. Individuals that are new to using their credit can still have a good score.
In sum, these are the 5 factors and their corresponding approximate weight. The first 2 factors are the only factors you should concern yourself with.
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.
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.
These are the five influencing factors on your score. You will also find approximately how much each factor impacts your score.
1. Payment History (40%)
This holds the most value. Your credit report will report your balances, minimum payments, credit limits and payments received.
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.
This is where negative marks are taken into account. You can remove negative marks by disputing the mark with the credit bureau or settling the debt.
I suggest trying to dispute the listing first. If the listing is verified then settle with the lender and in exchange for your payment get them to agree in writing to remove the negative listing from your credit report.
2. Ratio of Debt to Available Credit (30%)
This is how much credit is available to you that is not being used. Is your credit card at the credit limit?
If you can show the credit bureaus that you have available credit it will help your score. I suggest keeping a credit card balance at 10% of your limit. This helps because you are showing that you use your credit and you use it responsibly.
3. Pursuit of New Credit (10%)
How often is your credit run? If it looks like you are constantly having your credit checked your score will be lowered.
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.
The credit bureaus expect to see some inquires for your report.
Just try to avoid making a lot of purchases using your credit. There are people that switch phone plans and buy cars multiple times in a year and this will hurt your score.
4. Credit Experience (10%)
You should not worry about impacting this factor. It simply shows what type of purchases you have made.
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 has your credit been in use? Did you just recently make your first purchase with your credit?
You should not worry about this factor. Individuals that are new to using their credit can still have a good score.
In sum, these are the 5 factors and their corresponding approximate weight. The first 2 factors are the only factors you should concern yourself with.
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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