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1.2. Factors in Determining Your Credit Score

Now that you have reviewed your credit report and have a general understanding of the data reported which was used to generate your FICO score, we can begin to dissect how a credit reporting agency determines the credit score. This will also give you a clear direction on what changes you need to make to improve your credit score.

35% of Consideration Is Payment History:

The creditor you owe money to, will report when and if you are making payments. Good or bad, it will be reported. Are you making payments in a timely manner and in compliance with the original agreement made with the creditor?  Do you have a consistent history of making payments right before or past due dates?  Do you have past or prior accounts that are considered charge-offs, collection activity, or any other occurrences of foreclosure, bankruptcy, suits, liens, or repossessions?

By Making your payments to the creditor on time consistently will help increase your credit scores by approximately 35%.  Making payments on time needs to become a habit. If you are making your payment on time, keep up the good work. If you’re not, start now!

30% of Consideration Is Amounts Owed:

Are you spending more than you make?  This is ultimately what credit reporting agencies are looking at here. What is your total debt, debt on individual accounts, number of accounts, percent of available credit converted to debt? If you have exhausted all possible options for credit, this will have a negative impact on a credit score.

It is crucial not to spend more than you make!  If you are maxed out on accounts and credit limits, it shows the credit reporting agency that your debts are getting higher than your income and your ability to make the payments PLUS cover living expenses will be difficult. This could result in potential default.

15% of Consideration Is Length of Credit History :

Creditors like to see consistency in paying your debts and they look for trends.   How long have you had an account with a creditor?  An insufficient credit history, not using your credit or lack of credit history will have a negative impact on a credit score.  The CRA’s prefer to see a loyal history with creditors as opposed to constantly refinancing or switching accounts from credit to creditor.  Be consistent!

10% of Consideration Is New Credit:

The number of recently opened credit accounts and their proportion to total open accounts and/or the number of recent credit inquiries may be viewed as an indication of cash flow problems. However, new credit, if indicating re-establishment of a positive credit history following credit problems will have a positive impact. (Certain inquiries, such as those put through by companies seeking customers for ‘pre-approved’ credit card offers or those by existing creditors monitoring existing customers credit performance, are not considered in the credit score.)

10% of Consideration Is Types of Credit Used:

Too many credit card accounts, revolving retail charge accounts, or loans from certain types of lenders such as finance companies can have a negative effect on scores. Be patient and don’t rush to every “possible” opportunity to leverage your credit. Try to wait, save, and pay cash when you can.

As you can see, there are multiple different facets taken into consideration when calculating your credit score. It is important to remember that your credit score is a result of your actions. Whatever your credit score is currently at, don’t forget that it took years to earn the score you have, and it will take some time and effort to change your current score.  If you are realistic in your expectations and deliberate in all actions associated with your credit, improved your scores will follow.  Click here to learn how to repair your credit score.