Your credit score is a very important number. It will decide many things in your future, including whether or not you will qualify for auto loans, credit cards, and mortgages; what interest rate you will have to pay, and many other credit limits. But many people do not really know what affects their credit ratings, nor do they know how to improve their credit ratings. It is not just about paying your bills on time. There are many other factors the the credit reporting agencies consider when determining an individual's credit score.
Credit Score Composition
Punctuality of Payments (35%) - The single largest portion of the credit score is punctuality of past payments. Credit score is affected only by payments more than 30 days late.
Available Credit (30%) - Almost one third of a credit rating is calculated by the ratio of debt to available credit for revolving accounts, such as credit cards. This is the amount of credit that is available to be used.
Length of Credit History (15%) - This is portion of the credit rating is determine by how long your credit history goes back. When determining your credit rating, the age of your oldest account, and the average age of all your accounts are taken under consideration.
Types of Credit Accounts (10%) - All three credit reporting agencies like to see a mixture of different types of credit accounts, including installment, revolving, and consumer finance.
Recent Credit History (10%) - One tenth of the credit score is calculated by recent credit searches and recently obtained credit. This includes financial institutions running your credit with or without your consent, as well as if a new credit account was recently opened.
Tips to Improve Your Credit Rating
- Pay all bills on time. One late payment
could take your credit score down up to
100 points. Try to use automatic payment features if possible.
- Try to keep balances for accounts such
as credit cards under 60% of total available credit.
- Open non credit accounts, such as savings and checkings accounts.
- Don't close older unused credit accounts. This will lower both your level of available credit, as well as the average age of your accounts.
- If you can afford to, do not declare bankruptcy. Most people with accounts that are in delinquency or collections will suffer an ever greater deduction from their credit ratings if they file for bankruptcy.