How to Compute a Credit Score

It may sound creepy, but you're being tracked. Somewhere, a statistician is logging down your on-time Visa payments and your missed department store card payment. They can see if you have a car loan out, a past bankruptcy filing and where you live or work. At the end of the day, they churn out a three-digit number that answers the question: Should I loan to this individual, and if so, what rate should I charge?

Instructions

1

Don't miss a credit card payment. In the breakdown of your credit score number, 35 percent is based on payment history. It's easy to say, "Who cares if my payment is a few days late?" Yet, according to the credit bureau, the worst sin is missing or falling behind on a credit card, utility bill, mortgage or car payment. In some cases, your score could plummet up to 100 points and take 24 months to improve just from one missed payment.

2

Stay well below your credit limit. The second most important factor on your credit score, accounting for 30 percent, is the amount owed. Credit experts recommend that you use less than 30 percent of your "total available credit" limit. A credit card limit of $1,000 means you can safely spend $300 before your score is adversely affected. While this sounds misleading and dumb, creditors know that the closer you get to your limit, the more financial trouble you may be in.

3

Don't close out old cards. The third biggest factor is how long you've had credit history, which accounts for 15 percent of your score. Closing out old accounts hurts you because it appears as though you've had credit for a shorter period of time. Creditors want to see that you have a long history of paying bills on-time, managing financial responsibilities and juggling different accounts. These trends show you're a less risky borrower, entitling you to better interest rates.

4

Go easy on applying for loans. Another 10 percent of your score is based on "new credit" inquiries. Whenever you fill out an application for a credit card, car loan, mortgage or bank loan, an inquiry is made at the credit bureau to check your score and determine which interest rate to offer. Statistically speaking, people with six or more inquiries on their credit report in a one-year period are eight times more likely to declare bankruptcy, so keep your inquiries low.

5

Mix it up. The final 10 percent of your score is based on the types of credit you have. Experts say there are three types of "good debt" that improves credit portfolios: fixed rate mortgages, low-rate student loans and car loans. Revolving credit shows that you are capable of paying what's expected of you, month by month, for an extended period of time. Combining installment loans with one or two unsecured credit cards is ideal.

6

Don't sweat it. The most recent activity is weighted more heavily than the distant past. About 40 percent of your overall credit score is based on the last year's activity, 30 percent on the last 13 to 24 months, 20 percent on the last 25 to 36 months and 10 percent on the last 37-plus months. Within seven years from your first missed payment or debt, nearly all items will drop off your file, whether you've paid or not.