Understanding Your Credit Score

Most of us do not know how our credit score is determined. It is not the most difficult thing in the world, but what makes it a little hard to understand is that it can change every month based on our debts, payments and credit activity. There are many resources to help you maximize your credit score, but overall, you need to take responsibility for your credit score. If you search the web for “manage your credit score”, you will find many sites with great resources providing information on ways to manage your credit score. If you manage your credit well, you will be amazed how much money you can save!

Your credit score is based on 5 major categories:

1. Payment history represents 35% of your credit score.
Lenders and banks want to see how well you pay your bills each month. Your credit score is affected by late paid bills and how many were sent out for collection.

2. Current debt represents 30%.
How much is owed on your home, on your car, on your credit cards? Ideally you want to keep your credit card and any lines of credit at 25% or less of their total limits. If it is higher, it starts to lower your credit score. If you have a card above this limit, quickly reduce this balance below the 25% level so there will not be any impact on your credit score.

3. Length of time you’ve had credit, or loans, or credit cards represents 15% of your credit score.
Again, lenders and banks get to see a longer payment history if you have had credit for a longer amount of time. They view your past payment trends as good sources of determining how you will do making payments in the future.

4. The type of credit you have makes up 10% of your credit score.
The number of loans, credit cards and available credit you have at your disposal, listed in your credit report, impacts your credit score. Having too little or too much could hurt your credit score. The appropriate level is an individual determination, so each person will have to monitor this on their own.

5. The final 10% of your credit score is determined by the number of inquiries on your credit report.
If you apply for a lot of credit cards or loans, these finance companies will check your credit report and show up as inquiries. Credit inquires hurt your credit score because they signal that you may have financial trouble or that you are planning on adding loans and debt. The more recent these inquiries, the more they can damage your credit score. FYI, your credit score is NOT affected when you check your own credit report.

Keep these five areas in mind as you manage your credit score and you will be well on your way to maximizing your credit score. Remember, by law you have the ability to receive a free copy of your credit report each year.
Click here to receive your free credit report.