Aspects to Your Credit Score

Have you got a copy of your credit score yet? Do you know what the 5 components are to your score and how much each one is worth?

As you well know, your score is a 3 digit number that the credit bureaus use to determine your credit worthiness.

It's like a financial report card; the higher the score the better your credit.

The bureaus won't reveal the exact formula used to calculate your credit score, however they have revealed the 5 major components that make up the formula.

Each area is assigned a specific percentage that contributes to your overall score.

Payment history: 35%

Amounts owed: 30%

Length of credit history: 15%

New credit: 10%

Types of credit used: 10%

Now that you know what the 5 components are, let's look at how to improve and increase your score with each one.

Payment History:

This area makes up the largest portion of your score. It makes sense that missed payments will affect this part of your credit score, but did you also know that a late payment has much the same affect?

The credit bureaus view late payments pretty much the same as a missed payment, even if it's just a few days late. So if you think that holding off your payments for just a few days more won't hurt your credit score, it will.

So do you best to make your credit card payments on time, even if its just the minimum required amount.

Amount Owed:

This is basically the amount of money owed vs. the total amount of available credit in all your active accounts. The number that the credit bureaus like to see is somewhere between 30% and 50%.

So if you have $10,000 in total credit but only have $4000 total owing, your debt to credit ratio would be 40%, which puts you in a good spot with the credit bureaus.

The other thing to factor in here is the number of accounts open. You should have about 2-3 accounts to demonstrate that you are a responsible credit card holder; any more that this and it might look like you are over extended, which will hurt your credit score.

So to recap, keep the amount of debt owed vs. your total available credit to under 50% and try and have at least a few active accounts so you can add positive history to your credit file.

Length of Credit:

Does size matter? You bet it does. The third most important factor when it comes to your credit score is made up of 2 parts; the first is the length of time since your first credit account was opened and the second is the average length of time your accounts have been opened.

In both cases you want to have a few well established accounts on record. So if it's been a few years since you've opened an account; great. But try to avoid opening any new accounts unless you really, really have to because this will lower the average overall length of your credit accounts.

New Credit:

As I just said, adding too much new credit to your file actually hurts your score in 2 ways. The first way is that ever time you apply for new credit, a credit inquiry is pulled against your file which damages your account and lowers your score.

The second way that new credit affects your score is that it lowers the overall length of established credit on your file. Each time a new account is open the average length of your established accounts drops because the new account is now taken into consideration.

If you take only one thing away from this section, let it be this. Before you apply for any new credit, try reducing the amount you owe on your open accounts. You'll free up credit and add positive credit history to your file at the same time.

Type of Credit:

The bureaus like to see that you're responsible when using credit and they like to see diverse types of credit on your file.

Having many different types of credit i.e. credit cards, line of credit, installment debt, etc gives your file some teeth. The bureaus want to see that your availing yourself to their services but at the same time not overextending yourself, so try and keep your balances vs. what is available to you at a minimum.

Remember these 5 components of your credit score the next time you go to open a new account or apply for a credit card. Depending on your situation, it might hurt or help your credit report.