Too many people feel lost when it comes to understanding how their credit scores are calculated and that they are powerless to do anything to keep better scores as a result. The truth is that there is a method to the madness of credit ratings. You can get a grip on the rules and use them to your advantage. The first step, however, is knowing how your numbers are computed and what you can do to get them up and keep them up.
Your keys to ratings' success can be found in five areas: your payment history, the amounts that you owe, the length of your credit history, new credit accounts that you have acquired, and types of credit that you use. Let's look at each one in turn.
Your payment history composes 35% of your score. The obvious key here is making your payments on time all the time. The effects of a late payment will diminish as time passes. If you have trouble with getting things in when you should, figure out why. Is it a money issue or is it a lack of organization on your part? If it's a money thing, you know what you need to do. If it's organization, pay your bills online with electronic bill pay offered through your bank or credit union. The computer won't forget to pay Mr. Visa.
The amount that you owe versus your available credit composes 30% of your score. If you have four cards with limits totaling $10,000 and you owe $2,000, this puts you at 20% of your available credit. This is a good place to be. If you have one card with a $2000 limit and you owe $2000, this puts you at 100% of your available credit. This is not a good place to be. The sweet spot for the premium scores seems to be no higher than 20-25%.
The length of your credit history is 15% of your score. Scorers look at the age of your oldest account, the newest, and the average of all accounts. If you are going to keep some accounts and close others, keep the oldest ones. If you choose to keep the newest instead, you could have just shortened your overall credit history by years.
New credit accounts compose 10% of your score. They look at new accounts as potential avenues for you to get yourself into trouble. Why would you open them unless you were planning to use them, right? If you open multiple lines of credit simultaneously, you are raising a big red flag. You are planning to spend - and spend big.
The types of credit that you have in use compose 10% of your score. The objective here is to have a balance for better results. A good menu for you would include revolving credit, installment credit, and a mortgage. This shows that you can handle multiple responsibilities well. If you can do that, you are a better risk.
Following these hints will help you get where you want to be and stay there. If you are in credit trouble, there are definite strategies to help with that too. It's best, however, to understand how the rules of the game are played before taking the field. This will help to ensure a better outcome for you and keep the headaches away.
Greg Nixon is a high school English teacher who includes personal finance issues into his language arts curriculum. He began the mini-lessons to help his students understand more of how money works.
Please see his blog, The Student Financial Times, for more topics that he covers in class weekly.
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