Understanding Your Credit Report Score

Understanding your credit report score can sometimes be like trying to decipher ancient Egyptian hieroglyphics. Until recently, the score itself and the methods for calculating it were a complete secret.

While the exact method of how your credit score is figured is still a secret, as it is proprietary information belonging to its creator, the Fair Issac Corporation, the score and the variables that are used in calculating it have been made available to consumers.

There are five factors that go into calculating your credit score. Knowing what they are can help you to understand your score and how you can improve it. Each of them account for a percentage of your score. Obviously, those variables weighted with higher percentages will have a greater effect.

Payment History

Your payment history accounts for 35% of your credit score. This means that any late payments will cause your score to go down, and always paying on time will have a positive effect. It is also time sensitive; in other words, a couple of late payments that happened a year ago won't have much of an effect on your score, while being current on all of your payments today will have a large effect.

Amount of Outstanding Debt

The amount of debt that you carry accounts for thirty percent of your score. Generally, the greater your debt burden the more it will negatively impact your score. However, it is not so simple as that. Where it gets complicated is that it isn't so much about your total debt, as much as it is about how many of your credit lines are at or near their maximums. To help with this portion of your score, keep your credit card balances at no greater than 25% of their maximums.

Age of Your Accounts

How long you've had your credit accounts makes up fifteen percent of your score. For this reason, you should never close your oldest credit account. The reasoning behind looking at the age of your accounts is that the longer your history with a particular creditor or group of creditors is, the more accurately how you've handled those accounts predicts your future behavior.

New Credit

New credit accounts for ten percent of your score. This has to do with the number of new accounts you have and the number of inquiries about obtaining credit you generate. When you open a new line of credit or when you generate an inquiry for your credit report as part of a credit application, it will negatively affect your score for a short period of time. This is because the way they view things, anyone who opens up more lines of credit or applies for more credit is at risk for acquiring too much debt.

Over time, and so long as you do not open up too many credit accounts, your new credit accounts will become established accounts, and will raise your score in the long run.

Types of Credit

The types of credit you have account for the final ten percent of your score. To positively influence this area, you need to have several different types of credit on your report. Types of credit include, credit cards, auto loans, and mortgages.

Ideally, you want to have at least one big ticket item on your credit report, such as a mortgage or a car loan, and no more than two or three credit cards.

As you can see, quite a few variables go into calculating your credit score and for the most part, you have some influence over all of them. However, the biggest factor that underlies all of the others is time.