Here is what you need to know about the calculations used to determine your score:
- Your overall payment history. One of the most critical items that credit bureaus will examine is how you pay your outstanding debts. This alone can account for more than one-third of your overall credit score.
- Length of credit history. The longer you have shown a clean credit history, the better off you are. The less time you have had outstanding credit, the weaker your credit score will be. Generally, credit bureaus will weigh this as about 15 percent of your overall score.
- Using credit responsibly. When you are maxing out your credit cards monthly, the credit bureaus take a very negative view of your credit utilization. Generally, they prefer to see you using 30 percent or less of your available credit. The weight of credit utilization accounts for one-third of your overall credit score.
- Type of credit you have. If all of your credit history is a mortgage loan or a car loan, the credit bureau tends to frown upon this. What they prefer to see is a mix that includes installment loans, credit cards and car loans in addition to your mortgage. The good news is that this factor only accounts for about 10 percent of your overall credit report so for most consumers, this will have very little impact on their overall credit score.
- New credit can reflect poorly. Some consumers will open up multiple accounts in a short period of time. This is especially true if someone has worked hard to rebuild their credit. Opening multiple loans, credit card accounts or installment loans in a short period of time will lower your credit score since it accounts for about 10 percent of your overall score.
The Good News for Consumers
It is important that consumers understand how their credit scores are calculated. The good news is that addressing specific issues such as over-utilization of credit can easily increase your credit score. Some consumers find they can do much better by consolidating multiple cards into one credit card at Oklahoma Central Credit Union. Keep in mind, we often offer cards with a lower overall interest rate which can mean an increase in buying power and easier debt management.
Your credit report can be used by lenders to determine what kind of credit risk you are when applying for a car loan, searching for an apartment or when you are considering a home mortgage. Make sure you use credit sensibly and make regular payments to keep your credit score higher.