When considering your credit score the majority of creditors look at your Fico score issued by the Fair Isaacs corporation. Once secrecy surrounded their scoring algorithm but now there is transparency in how the score is compiled which removes much of the guess work. Your credit score is compiled from credit reports issued by the three main credit agencies, Equifax, Experian and Trans Union, and is meant to be an accurate reflection of your credit history.
It is far easier for a credit score to fall than it is to rise again and those who have never previously used credit can have difficulty in establishing a credit history as their risk factor is unknown. There has never been a time when credit scores are as important for consumers as they encroach into many areas of life which they were not originally designed to impinge on, and are run as a profitable business.
Your payment record history is the most important part of your credit score as 35% of the score value is affected by it. A perfect payment history puts you well on the way to an excellent credit score whilst late or missed payments impact negatively. Defaults, collections activities and missed payments will stay on your record for 7 years but will lose their importance as more up to date payments are made on time. Bankruptcies stay on your credit file for 10 years.
The credit to debt ratio comprises an additional 30% of the Fico score and is determined by how much of your available credit you use. The recommended amount is no more than 30%, so those who typically max their credit cards out each month appear as a much higher risk. Hovering around your credit limits sends warning bells that you may be about to live beyond your means. Those who have the most excellent scores carry balances of less than 30% of their available credit and pay it off in full each month.
The length of your credit history counts for 15% of your credit score which is why those new to credit have an upward struggle in actually obtaining credit unless it is secured. Closing down old credit cards which you no longer use can have a negative impact on your credit score and your oldest cards should be retained to represent the length of your credit history.
New lines of credit influence your credit rating by 10% which is why you should never apply for too many credit cards or loans all at once. Try and ensure you meet the scoring criteria of credit cards which you apply for as if you apply and are rejected it will show as an application on your credit report. However when applying for mortgages this does not apply as they enquiries are treated as one application.
The type of credit you have accounts for the final 10% of your Fico score and a mix of credit between instalment and revolving credit looks better than just revolving credit. Instalment credit is represented by mortgages and loans, but obviously the payments need to be made in a timely fashion.
These are the five key areas which affect your credit score and should be paid particular attention to. Rate tarts that chase the best balance transfer offers will save money on unnecessary high interest payments but can negatively affect their credit score by constantly applying for new cards.
Before any major purchase such as a home or new car it is recommended to obtain a free copy of your credit reports and check if there are any errors which need to be removed. Striving to achieve an excellent credit score is a must these days as your credit score can affect your interest rates and your insurance premiums. Employers do not see your credit score but can pull your credit reports and make a judgment on the information contained therein, so it is crucial to have a shiny report in good order which speaks of a person who handles their finances responsibly.