Determinants of Your Credit Score

 

A credit score is a formula-generated number that determines your chances of getting your credit applications approved. It also determines the status of your credit standing. Hence, your credit rating is directly dependent to your credit score. That's why it is extremely important to know the things that determine your credit score.

 

What is Included in Your Credit Rating:

 

To make a long story short (and some credit reports are very long), what’s included in your credit report, upon which your credit score is based upon, is all the debts you currently have. Also, there is a history of all the debts you’ve had in the past ten years or so, and special emphasis is put on anything that has gone wrong. Defaulting (never paying) on any debt will ruin your credit rating completely. Borrowing a lot before you start paying anything back will make you look like a very bad risk, and so will going all the way up to (or even over) your limit on a credit card.

 

It is also worth considering that the credit reports of anyone you live with may be linked to your report, and could reflect badly on you – your wife or husband’s credit rating is tied to yours quite closely.

 

Here are things that will affect your credit score:

 

1.  Your payment history

 

Late payments, especially recent late payments, are a cause of concern. If you've had some late payments years ago, but nothing recently, your score will not suffer nearly as much. Bankruptcies are included in this part of the score. Also, if you've ever been reported to a collection agency, that's also a big negative. About a third of the score is based on this factor.

 

2.  Outstanding debt

 

How much do you owe? How many credit cards do you have? How close are they to being maxed out? About a third of your credit score is based on this factor.

 

3.  Length of time you've had credit

 

Longer is better, because it will cause your payment history to be more accurate and predictable. If you've had a credit card for many years, and don't use it, keep it. It will improve this factor. Of course, if they're charging you an annual fee, you might want to try to negotiate with them about that.

 

4.  Number of inquiries into your report in the past year

 

When you apply for credit, a notation is made in your report, and a lot of recent inquiries means you've been applying for a lot of credit. The fewer, the better. This factor accounts for around 10% of your score.

 

5.  Type of credit