Wednesday, December 25, 2013

Credit score Basics

If you are interested in improving your credit score or are wondering why your score suddenly dropped, the first thing you need to know is the components of the FICO score.

Here are your FICO Score components

- 35% Payment History

- 30% Amount Owed

- 15% Length of Credit History

- 10% New Credit

- 10% Types of Credit Used

The Payment History component makes up two thirds of your score and it means that the more the years of making payments on time registers on your score, the more it would rise. Or the longer you've been paying responsibly, the better it gets, and vice versa. If you keep on paying late, on the other hand, the Payment History segment would plunge.

Credit score Basics
The Amount Owed component is about your used credit versus your available credit. If you have used up more than 50% of your available credit, this component takes a negative hit. It’s worse when you are close to maxing out your credit limit. If you have little or no debt and have a steady stream of income, this component increases. If, on the other hand, your debt amount heavily outweighs your income, then this portion of the FICO score will surely suffer.

The Length of Credit History component is about how good you are in keeping an account. It will be good to your credit score if you have accounts that have been open for at least 10 years or more. 

The FICO scoring system calculates your oldest active account and the average age of all accounts. Simply put, the longer your credit history is, the higher this portion of your FICO score will be.

The New credit component is about how many credit types you have. Did you know that this segment of your FICO score will be affected negatively if you open several new credit accounts in just a short period of time? This component is related to the Length of History segment. If you are going to open new accounts make sure that they are of different kinds. Not just the credit card. Take not also that when you open a new credit or you apply for one, your lender would sure run a credit check to see if you are a credit risk. Multiple credit report inquiries tend to impact your credit score negatively, although there’s what they call "soft credit inquiries,” - which don’t really hurt your credit. Soft credit inquiries are the ones made by you, a prospective employer or by a lender. It can be very confusing but perhaps knowledge of a cut-off period would help. Multiple inquiries by car loan companies and mortgage lenders over a 30-day period are only counted as one inquiry.

The Type Of Credit component would be your credit cards, retail accounts and different loan types.

What doesn't the credit score include in its calculation?

Your age, occupation and income (including financial gifts and/or support you received).

What are the ways to increase the credit score?

1. You can look for models. Look for folks whose credit scores are 800 or higher. If you can’t find them, here are some of the things that they are doing right :

2. They have four to six credit types

3. In the past seven years they don’t have late payments

4. They have an excellent payment history on installment loan, mortgage or a car loan

5. Their accounts have an average of 10 year-credit history and a few accounts with 20 years of good history,

6. They have a very few number of credit inquiries in the past six months

7. They have not filed bankruptcy, have not experienced foreclosure, have no charge-offs or collections,

8. They have only used 35 percent of their overall credit limits per account.

In short, your credit score would improve if the creditors or lenders can see that you have a habit of making all your payments on time, which your credit report would reflect. Also, if you’re able to keep a variety of credit types, and are not pushing your credit line to the limit, then you’ll have a good chance of having a great credit score.

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