The three credit reporting agencies that accumulate information used to calculate your credit score are Equifax, Experian and TransUnion. Low credit scores are indicative of a bad credit risk and will prevent loan approval and increase insurance rates. Fortunately, you can raise your credit score in a number of ways, including making all of your payments on time for at least six months. Learn the other elements that factor into your credit score and you can take steps to improve your financial health.
Definition
A credit score is a reflection of credit worthiness at any given time. Credit scores range between 300 and 850, higher numbers are best. Three main credit reporting agencies compile and maintain credit files which contain specific data on the credit activities of individuals. Credit scores fluctuate based on changes in the information used to calculate the scores.
Factors
Five primary factors affect your credit score and an improvement in any one of these areas can help to raise your credit score. Payment history, outstanding debt, various types of credit, length of your credit history and new credit inquiries are the main components in credit score calculation.
Payments
Payment history is the factor that weighs most heavily in computing credit scores; it accounts for 35 percent of the overall total. Recent payment history factors into the calculation heavier than distant payment history. If you make payments on time for six months to one year, you can raise your credit score. On-time payments must be consistent for all of your open accounts.
Debt
Debt-to-credit ratio, or outstanding debt, is another primary factor in credit score calculation. Debt-to-credit ratio accounts for 30 percent of the overall score. Determine the ratio by dividing the amount of your total outstanding debt by the amount of your total available credit. For example, if you have $20,000 of available credit and owe $10,000 against that credit, your debt to credit ratio is 50 percent.
Impact
Higher credit scores will help you qualify for loans with lower interest rates, which can translate into hundreds of dollars each month in reduced payments. Even if you have no plans to purchase a new home or car, raise your credit score to save money on your current homeowners', renters' or vehicle insurance policies.
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