Factors for calculating your Credit Score

Payment History (on an average 35% of your score is based on this history). When you apply for a loan the first thing that a lender usually examines is whether you have any unpaid credit accounts in the past. This is because any history of late payments may decrease your score although this happens in rare occasions. A late payment occurring once or twice is outweighed by an overall good credit picture. Again if you do not have any history of a late payment that does not mean that your credit score will improve. This is because late payment is only one of the factors that are considered to evaluate your score.

The general payment information which your score takes into account is:

1. Various types of account information: While calculating your credit score information on your credit card accounts, loan accounts, finance company accounts are taken into consideration.

(a) Public records: This type of payment information is considered very serious because this deals with reports of bankruptcies, wage attachments, liens, and judgments. Hence, any recent report of larger amounts will decrease your score heavily. Bankruptcy will remain in your report for 7-10 years depending on the type.
(b) Accounts reflecting no late payments: If the accounts which you owe show no late payments then it will definitely improve your credit score.
(c) Late payments detail: Information on your late payment accounts like the amount you owe, age of those accounts, number of those accounts are considered for evaluating your credit score.

2. How much amount do you owe on an average? 30% of your score is based on this criterion: You may have credit accounts but that does not mean that your credit score will be lowered or the lender will undertake greater risk, if he approves your loan. But the risk factor arises when the credit amounts go beyond your affordability level. This might give some red signal to the lender about your loan repayment credibility. In determining credit score the credit bureaus consider the amount you owe on specific type of accounts such as credit card accounts, and installment loans. The basic principle considered for determining credit score is how much excess money you owe when compared to your income.

3. Duration of your credit history: Almost 15% of your score depends on this factor: Your score as an individual will increase if you have a long credit history which will help you as a borrower at the time you seek to avail a loan. However, even if you are not using credits for long, your score can improve provided other information on your credit report is fulfilling the criteria.

4. Availing a new credit: Attributes almost 10% of your score: There is a general tendency among us to open many credit accounts and opt for online shopping. You may have the desire to open or own multiple credit accounts but that may affect your credit score. This happens because this aspect increases your credit risk especially if you do not have a long credit history. If you have multiple credit requests then it increases your credit risk further. In general while determining your credit score the credit bureaus does consider the type of accounts you have opened, the age of those accounts, whether you made any recent credit request or not, and whether you recently have a good credit history. Thus opting for credit accounts neglecting your score is not a prudent decision.

5. Credit Mix: Manipulates at least 10% of your credit score: Your score will bring into consideration your credit cards; retail accounts; installment loan accounts; finance company accounts and mortgage loan accounts. For the purpose of increasing your credit score it is not a good idea to open credit accounts which you do not intend to use.

All the above stated factors if kept in mind can help you to increase your score. This is because a good credit score permits you to have better credit offers, low interest rates while availing any loan, and speedy credit approvals.

For example, Mr. Reeve’s credit score is 710. If he has a 30 year fixed mortgage of $ 150,000 he can save approximately $ 131,000 over the life of the loan or $ 365 on each monthly payment. Now if you can increase your score from 550 to 710 you will also be benefited like Mr. Reeves.