Credit Scoring

Credit scoring creates the number that rules your financial life. Credit scores are used for everything from determining the interest rates you are offered on credit cards and loans, to determining how trustworthy you will be as an employee. Some professional licensing organizations also use credit scores to approve or reject applicants.   This clearly illustrates how important credit scoring is to your livelihood.  To get your credit score, you need to contact AnnualCreditReport.com. 

What is a FICO Score?

Credit scoring uses a multi-factor formula. It looks at the length of your credit history, the number of credit accounts you have, how long each account has been open, what your credit limits are, how high your credit balances are, the number of late payments you have made over the last couple of years and the number of inquiries made about your credit history. To complicate this process further, each credit reporting agency uses their own formula and strategies to come up with your FICO score.

What adds some confusion is that you can have three different credit score at the three major credit bureaus: Experian, TransUnion, and Equifax.  Each uses a different algorithm to determine your credit score.  To alleviate this discrepancy, the credit bureaus got together to create the Vantage Score, which has one base credit score.  

What Impacts Your FICO Score

There are several things that negatively impact credit scoring results. Some of these things include late payments, high credit card balances, low credit limits, limited credit histories and missed payments. Too many inquiries into the status of your credit history can also drop your credit score.  When it comes to credit cards, your credit card balance should be 40% of the overall limit.  Therefore, maxing out your cards can lower your credit score. 

How to Improve Your Credit Score

If you are interested in improving your credit score, here's how to make sure that your credit accounts are all in good standing:

1. Keep your credit balance well below your credit limit.  This includes your total debt portfolio, not just one card at a time. 
   
2. Keep your accounts current and active. One mistake people make is to cancel out old credit cards if the cards are not currently being used.  As a credit score rests on longevity, as well as your responsibility with paying off debts, it's important to not cancel out older cards.
3. Don't open new credit accounts within six months prior to applying for a home loan or car loan, as this can negatively affect credit scoring.
4. It should go without saying: pay bills on time. 
   

Remember, defaulting on a payment is not the only thing that can lower your credit score.  There are a number of other factors, such as the length of your credit history, which is just as important as paying bills on time.