Your credit rating, commonly known as a credit score, is based on the information contained on your credit report. Only the information on your credit report affects your score, so if you have an account that does not appear on your report or if someone else's account or other mistake appears on your report, your rating might be affected. Your credit score is based on five major areas of your credit history.
Record of Payments
The biggest factor in your credit rating is your payment history on all types of credit accounts. The scoring formula penalizes you for missing payments, filing bankruptcy or settling an account for less than you owe, but the effects of these negative elements diminish over time. Types of accounts that do not usually appear on credit reports, such as utility bills and parking fines, can hurt your score if the creditor sends the account to a collection agency when you are severely delinquent. Paying your bills on time helps your credit score, which also considers how many accounts you have that are currently paid as agreed.
Account Balances
Thirty percent of your credit score is based on how much you owe on each of your accounts. Part of your score is based on how many accounts you have with balances and what those balances on each type of account are. Your score also reflects the share of your available credit that you are using. With revolving credit accounts, such as credit cards, the scoring formula penalizes you for using a high percentage of your overall available credit and for using a high percentage of your credit limit on an individual account. Therefore, you do better to have small balances on a few different cards than to have a large balance on one card and no balances on the rest. In addition, closing an empty credit line can hurt your score if you carry balances on other cards because it lowers your total amount of available credit.
Account Age
The longer you have been managing credit, the better. Your score increases as the time since your accounts were opened increases. Because the credit scoring formula considers your average account age, avoid opening new accounts all at once, because that could significantly lower the average age of accounts. In addition, try to keep your oldest accounts open and active so they stay on your credit report and continue to affect your score.
Mix of Credit
Lenders like to see borrowers who have been responsible in using many different kinds of credit. The two major categories are installment loans that have equal monthly payments over a fixed period, such as auto loans and mortgages, and revolving credit accounts that let you borrow from and repay money on a line of credit, like on a credit card.
Recent Account Openings
Someone who has been applying for and obtaining a lot of new credit poses a risk to lenders. This is because the individual could be having cash flow problems and is trying to borrow money to help solve them. The credit scoring formula penalizes you for credit inquiries, which result from a lender checking your credit report after you apply for credit. It also penalizes you for having new credit accounts on your report.
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