With lending criteria tightening up, and more lenders in the non-conforming arena going out of business, understanding your credit score is more important than ever. So what is your credit score based on?
1. Payment History. This category is the most obvious of the bunch. It doesn't take a brain surgeon to figure out that if you pay your bills on-time you will rate high in this category. Likewise, if you have late payments, charge offs, collections, and negative public records you will rate low. Also underconsideration is the number of negative items, and their age. If you have recent negative reports, it will ding your score more than if they are at least a year old.
2. Debt. The amount of debt you carry is next in the line up. All debt is considered (mortgage, auto loans, medical debt, credit card debt...) but credit card debt is the most heavily weighted. It's not how many credit cards you have, but how many you have MAXED OUT. The Revolving Utilization measures the amount of credit you have in proportion to the amount of available credit you have. For example~If you have several credit cards with a total available credit limit of $20,000, and you have total outstanding balances of $10,000 = .50 total revolving X 100 = 50% utilization percentage. Remember, the lower your utilization percentage, the higher your credit score will be. Ideally, you should try to keep your revolving utilization at 10% or less.
While the above two categories are the most important, there are other categories to consider.
3. Credit History Age. This category is looking to see if you have a long history of how you manage your finances. There is not really anything you can do to help this one out, other than just biding your time. Helping young adults start by wisely opening and maintaining a few credit lines is a good thing. Not only will it help them learn to manage credit, but also build up a credit history for down the road.
4. Credit Diversity. If your credit report is dominated by only one kind of credit (i.e. credit cards) and lacking in other types, you will not score as well in this area. A good mix of credit types is good.
5. Credit Inquiries. Each time you apply for credit, you are giving the creditor permission to access your credit scores. Excessive "inquiries" will result in lowering your score, so only apply for credit when needed.
If you keep these factors in mind as you manage your credit, you will be on your way to a score in the 800's!
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