CREDIT – HOW IT IS CALCULATED AND SOME TIPS

Have you have ever wondered how your credit score is calculated. An algorithm or formula decides your credit score using information from your credit report while comparing it to the reports of millions of other people. It gives any bank, organization or individual a highly accurate picture of your creditworthiness.

There are three major credit bureaus – Equifax, Experian and TransUnion. They all have a different way of calculating your FICO score. Factors that influence your credit score are based on your payment history, on how much amount you owe on your cards, your personal loans, mortgages, etc., length of credit history, new credit and credit mix.

Your payment history is influenced by the following factors:

A) Do you make your payments on time?
B) Have you been late on any of your payments and how late?
C) How often have you been late?
D) When was the last late payment?
E) Have any of your accounts been turned over to collections agencies and
how many?
F) Have you filed for bankruptcy?

While considering the amount you owe, the following factors are reviewed:

A) How many accounts do you owe payments on and how many have balances?
B) How much of your credit line have you used? Even if you make monthly
payments, having a 90% balance on your card at any point in time will
hurt your score.
C) In case of major loans, how much do you owe against how much you borrowed?

Length of credit comprises of 15% of your credit score. It is advisable to hold onto your older credit card accounts versus the new accounts, because the older your accounts, the better your score.

New credit comprises of 10% of your score. The factors considered are:

A) How many new accounts have you opened?
B) When was the last time you applied for credit or a credit limit increase?
C) And the length of the time since the credit inquiries were made

Credit mix looks at the overall picture. It is the mix of your credit cards, personal loans, mortgages, etc. The more balanced the mix, the better your score. Credit mix comprises of nearly 10% of your credit score.

What you should pay attention to: Your credit score is calculated based on the information on your credit report. Sometimes your credit report may contain incorrect information. Therefore, it is advisable to have a look at your credit report atleast once a year. If there is incorrect information, it will give you time to have the error corrected before you apply for credit.

A word of caution: Those store cards that you get at your local stores affect your credit. These private labeled credit cards actually belong to a third party rather than the store itself. When you apply for a card at a furniture store or at an appliance store, there is a credit inquiry and past due payments on these cards will affect your credit.

If you want to raise your credit score, you may want to reduce your debt. Avoid having a huge balance on any card at any given time. Sometimes monthly payments do not suffice due to high interest rates. Therefore it helps to quickly pay the debt you owe before applying for some more credit.

You can obtain a report from each credit bureau as they are legally obligated to give you a free report once a year. If you need help analyzing your report, there are attorneys who specialize in analyzing and helping you fix the errors in your credit report.