CREDIT SCORES

A credit score is a number that is calculated using a number of factors based on your credit and payment history. Lenders use credit scores to estimate risk. Analysis of those consumers with higher credit scores has shown that those with higher scores are less likely to default on a loan.

Credit scores are determined by calculations employed by the three credit scoring bureaus in the US, using data from your credit report. These calculations include 5 key areas of your credit report to determine your score. In order of importance, the 5 key areas include:

1) Payment History

Your payment history includes the number of accounts you have that are paid as agreed. It may include any negative public record or collection accounts. For delinquent accounts you may have, it may include the number of past due items, how long past due for each, and how long it's been since you've had a past due payment.

2) Amounts Owed

The types of accounts with balances and how much you owe on each is included. Credit scores consider how much of your revolving credit lines you've used to see if you may be over-extended. They also consider installment loan accounts to make sure you are making regular payments.

3) Length of Credit History

The length of credit history considers how long you've actually had a credit history, as well as the length of time since accounts were opened, and how long it has been since you've had activity. Scores are increased for longer histories without problems.

4) Types of Credit

The types of credit you have are important in establishing a credit score - installment loans, revolving credit card, or other charge accounts. Generally, a mix of different types of credit accounts is reflected in a higher score.

Credit scores may also take into account new credit accounts and the proportion new accounts represent of your total accounts. Scores look at recent credit inquiries, and the time that has passed between inquiries and newly opened accounts. The scoring bureaus may check to make sure you aren't attempting to open multiple new accounts.

Remember that credit scores are only one of the items that a lender will use to determine if, and how much, they are willing to lend to you. Lenders may also consider income, employment history, net worth, and the type and amount of credit you are seeking.

HOW TO IMPROVE YOUR CREDIT SCORE

You can improve your credit score, and thus your ability to borrow, by looking closely at your credit reports, and planning a course of action to correct and improve them. Five things you can begin doing may improve your credit scores over time.

1) Credit History

It sounds simple, but pay your bills on time. Late payments can be a major factor in driving down your credit score. Past due bills should be paid as soon as possible.

Often you can contact your creditors and their collection agencies to make a payment arrangement and negotiate with them to keep late payment notations off your credit report.

If you are deeply in debt and can't make any payments, your best bet may be to see a legitimate, non-profit credit counselor. There are many companies who promise to fix your credit report for a fee. If their promise seems too good to be true, it probably is.

2) Reduce Debt

Credit card balances should be kept low. The higher the percentage of debt you have compared to your credit limits, the lower your score.

The lure of lower interest rates offered by other cards in introductory offers is tempting, but moving credit from one account to another and having too many newly opened accounts, may also lower your credit score. When you pay off an account, don't immediately close it, as zero-balance accounts can sometimes help your credit rating.

3) Length of Credit History

Obviously time is the only thing that can improve this aspect of your credit score, but don't attempt to open too many new accounts in a short period, especially if your credit history is not well-established, as this may signal that you may not be able to handle credit wisely.

4) Manage New Credit Responsibly

Many credit inquiries on your account may mean you are trying to open multiple accounts, and that may not be looked on favorably by scoring software.

If you've had problems in the past, you may try to open a new account or two, and pay them on time.

Note that checking your own credit report does not affect your credit score.

5) Types of Credit Used

If you manage your credit wisely, you may want to have a mix of installment loans, revolving credit cards, and loans with fixed payments. Don't try to open too many new accounts in an effort to create a better mix. Closing accounts does not remove them from your report - these accounts remain in your history and may be considered in your score.