Thursday, July 26, 2012

Five Factors That Determine Your Credit Score

Credit scores are becoming increasingly important. While it was once only used for mortgages and car loans, it is now used by life insurance companies and even potential employers. In fact, 60% of employers perform credit checks on at least some of their job candidates. Maintaining a clean credit report and high credit score is increasingly important.

There are 5 factors that determine your credit score. Think of these factors in terms of what a person lending you money might want to know about your history with borrowing.

Payment history (35%) - Payment history refers to your ability to make payments on time. Your credit report shows bills that were 30, 60 and 90 days late. If you were 60 days late on a bill and then paid it, the fact that you paid late will still show on your credit report and affect your credit score. Making payments on time is the single most important thing you can do to increase your score and keep your report clean.

Outstanding debt (30%) - Outstanding debt is calculated as the percentage of available credit that is being used. For instance, if you have a $30,000 credit limit, and have $25,000 in debt, you may be viewed as overextended. Some experts recommend maintaining a debt balance of about 10% of your available credit, however the most important thing is to not overextend yourself. If you use your available credit wisely, your credit score will increase.

Length of credit history (15%) - The longer you have been using loans, the better for your score. Creditors want to know that you have been a good steward of your credit over time. This is also the reason to keep your oldest credit card. Remember that card you were issued in college (the one you signed up for to get a free pizza)? Unless the card has high fees, keep it active by using it once a month.

New credit (10%) - Opening several new credit accounts will hurt your credit score as this may indicate that you are suddenly a higher risk borrower. Try to open new credit accounts only when you need them. Instead, try to have the credit limits on your current accounts raised if you need additional wiggle room.

Types of credit (10%) - Having different types of credit accounts can help increase your credit score. Instead of having 3 credit cards and no other debt, creditors would rather see a mortgage payment, an installment personal loan and a credit card. This is most important when you don't have a long credit history. Over time, the importance of this factor goes down.

When you think about it, if you were loaning money to someone that you didn't know, aren't these the factors you would consider? A person's ability to make timely payments, responsible usage of credit, how long they have been using credit, if they are opening a lot of recent accounts, and their usage of various types of loans, would all be important to know. The most important thing to remember is to protect your credit history by paying attention to these 5 factors. It takes time and energy to protect and build a solid credit history. Plus, your future job may depend on it.

So what do you think? Have you ever been turned down for a job due to a blemish on your credit report? Has anyone ever told you of other factors that affect your credit score? Feel free to share by commenting.

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