What Influences My Credit Score?

There are a variety of factors a credit agency considers when determining your credit score. While the exact algorithms and computations are closely guarded by agencies, the basic formula is fairly well known.

The most important single factor in determining a credit score is a person’s payment history. Thirty-five percent (35%) of the determination is made by examining how well you make payments. If you consistently pay a good number of bills on time without being late, your score on this section will be higher.

If you have had bills sent to collection agencies, bankruptcies or unpaid bills, then your score on this section will be lower. The more recently you had a late payment, the more influence it will have on your credit rating.

The next most important factor is outstanding debt, which has a 30 percent bearing on your score. The most important aspect in this rating is the ratio of debt to possible debt. You should attempt to keep your debt at or below 30 % of your possible debt limits, and no more than 50 %. The ideal is to pay debt off altogether, where possible. Balances that are close to credit limits hurt credit scores.

The next factor considered with a 15% weight is the length of credit history. The longer you have had an account, the better your score is. For this reason, it is sometimes advisable to leave unused accounts open, at least as long as the credit companies will allow you to do so.

The recent inquiries on your report will have a 10 percent impact on your score. If you have “hard hits,” or inquiries initiated by you in a search for new credit, they will have a negative affect on your credit score. “Soft hits,” or inquiries initiated by companies wanting to offer you credit, do not negatively affect your score.

The type of credit you use also has an effect on your score. Specifically, loans from finance companies that specialize in high interest, high risk loans such as Beneficial Finance or American General, can cause you to have a lower score.

To improve your score, there are some simple steps you can take. First and most important, pay all bills on time. Even one or two late payments can have negative effects on your credit rating. Keep balances low on any revolving credit accounts (like credit cards or electronics programs), and pay off balances as quickly as possible. Avoid applying for credit except in cases when it is absolutely imperative.