How Does a Credit Score Get Determined?

The Credit Reporting Agencies

There are three main credit reporting agencies that have all the information on how you use credit. They translate this data into a score. The score is referred to as a FICO score after the company that developed the method, Fair, Issac & Co. The score ranges from 300 to 850, with 300 being poor credit and 850 being excellent credit. The credit reporting agencies are Experian, Equifax and Trans Union. Whenever you apply for credit, these three companies are contacted for your credit report and score.

What Determines the Credit Score

Your payment history determines 35 percent of the score. Then it is weighted with a high weight given to recent history. Late payment, bankruptcy and collections subtract from the score. Thirty percent of the score is due to outstanding debt. This debt is compared to your credit limits. Credit history is equal to 15 percent of the score. Credit reporting agencies like to see a long history of on time payments. If you have a lot of new accounts, it takes away from your score. Ten percent of your score is determined by how many recent inquiries you have. If you've been shopping for a mortgage and have had six different banks run your credit, it may negatively affect your report. The last 10 percent is the mix of credit you have. Too many credit cards or new cars is a negative.

How to Better Your Score

The first thing most people need to do is get rid of some credit cards. Three or four major credit cards is fine; more than that, and your credit score will suffer. If your balances are high, pay them down. Start with the smallest and pay it off. Then use that payment to start paying down the next, and so on, until the cards have smaller balances or no balances. Make sure you pay all your payments on time. Get a copy of your credit report and take it with you when you shop for a mortgage or a car. This way they don't all have to run their own, and there won't be any inquiries until you are ready to apply. If you have no credit at all, apply for a secured credit card. You will deposit a little money at a bank, and the bank will give you a credit card with a limit equal to your deposit. Use it and pay it off at the end of each month. Before long, you will be getting applications for unsecured cards. Use the cards wisely, and you will have a great credit score in no time.