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How Is a Credit Score Determined?

Online Shoppers

Your credit score is very important because it determines how likely a lender is to provide you with credit. This number is based on a number of things in your credit history and gives the lender a good idea of how safe you are as an investment. The more you understand about your credit score, the more you can work at improving it, so that you are less of a credit risk in the future.

Payment History

The most heavily weighed aspect of your credit score is your payment history, as it determines 35 percent of the number. If you pay your bills on time every month, you will receive a high number in this section. If you are frequently late with your payments, have been to collections or have filed for bankruptcy, it will have a negative influence on this section of your credit score. If you have recent late payments, it will have a larger influence than late payments in years past.

Level of Debt

The second most important thing in regards to your credit score is your level of debt. If you have credit cards, but they are consistently close to your maximum credit limit, it hurts your credit score. The debt level section determines 30 percent of your overall credit score, so it is best to keep your credit card balances as low as possible. If you are utilizing over 30 percent of your total available credit, it looks bad on your credit report.

Length of Your Credit History

The longer you have held credit, the better this section will look on your score. For this reason, it is a good idea to leave your accounts open for a long time, since it gives you a longer credit history. Lenders want to look for patterns, and if they see that you have had a solid credit rating for a long time, they will be more likely to grant you what you need. This section is worth 15 percent of your total credit score.

Number of Inquiries

Any time a lender has to pull your credit score, it shows up on your credit report. While an individual inquiry is not necessarily a bad thing, too many inquiries usually signals that you are applying for many different types of credit and, potentially, not receiving any of them. If you fill out too many applications in a short period, it sometimes means that you are taking on too much debt, which is a red flag to lenders. This section counts for 10 percent of your credit score, but these inquires are only counted for a year.

Mixtures of Credit

The final thing that accounts for your credit score is having various types of credit. As example would be having a credit card, a mortgage and a line of credit, since these are all different types of credit for which you can apply. This section counts for 10 percent of your overall credit score but is only really important if you do not have any other information on your account.

Improving Your Credit

The good news is that it is easy to repair your credit if you are aware of how it works. As long as you make your payments and keep your balances low, you can improve your rating rather quickly. Managing your credit does take some effort, but it is well worth it because it increases your purchasing power greatly.