Various factors impact your credit score, however; it is important to understand that there are various credit bureaus each of which assign you a score. In general there are five factors that make up your credit score. Most lenders use the traditional FICO score, this stands for Fair Isaac Corporation, which is the software manufacturer that the credit reporting companies use to calculate your score. The major companies in which lenders look at to obtain your credit score include TransUnion, Experian, and EquiFax. Credit bureaus monitor every aspect of your credit such as credit cards, student loans, mortgages, auto loans, and any outstanding collections.
The first item that the companies use to determine your score is your payment history. On your credit report lenders can see if you made late payments, missed payments, or ever defaulted on a credit card. It is important to pay all of your credit accounts in a timely manner before they report it to the bureau. It is always better to pay the minimum amount rather than pay nothing at all. Never pay a credit card bill with another credit card.
The second item that helps determine your score is the balances on all of your revolving accounts. The bureaus monitor how much credit you have used in ratio to the amount of credit extended to you. The actual number does not matter as much as the ratio does. It is always better to pay your balance in full. Keeping your balances relatively low will increase your credit score over time. View your credit card like it is a bankcard. Only spend money that you have at the time of purchase.
Everyone must establish credit at some point in their life. It is best to open a credit account while you are younger and only use it for absolute emergencies. The length of all open accounts is taken into account when factoring your score. Having many new accounts may signal that you are overextending yourself financially. Having multiple open accounts with zero or low balances will increase your credit as well.
The number of types of credit you have may impact your score. It is important not to have multiple loans, credit cards, or collection bills with high balances. The credit bureaus weigh the above categories differently depending on your individual situation. However, the proportions are as follows: payment history (35 percent), amounts owed (30 percent), length of credit history (15 percent), new credit (10 percent) and types of credit used (10 percent).
There are many activities that can hurt your credit score. Even paying other bills late can have a negative impact on your score. Applying for credit cards can have a negative impact if they submit an inquiry to your file. Even having too many credit cards with a zero balance can hurt you. Lenders fear if you were to max out your cards you would not be able to pay them back.
On the contrary you can take steps to improve your credit score. Never use more than 25 percent of your available credit. Consider using an automatic payment system for all your bills – just ensure you have enough funds to cover the payments. It is important to check your credit report once a year with each of the bureaus.
About the Author:
Kwame Kuadey runs a Ghana Travel Information website and a healthy fast food blog. He has written many articles on healthy fast food, including how to make healthy choices at fast food restaurants.