Consumers often use credit to purchase large items, such as a home or car. They also make use of credit in purchasing everyday items such as groceries, movie tickets and clothing. How well a consumer manages the debts incurred from the use of credit can have an impact on his credit score.
Payment History
According to Fair Isaac, the company that developed the FICO system, how well you pay your bills accounts for 35 percent of your FICO score. This percentage reflects payments to creditors. If you're late, each late payment will ding your credit score. The later the payment, the more detrimental it is. Accounts past 120 days late are usually charged-off by creditors and this can drop your score significantly. Plus, the creditor may sell the account to a collection agency. That agency will then place a new negative account on your report, further dropping the score.
Debt Load
How much debt you're carrying makes up 30 percent of your FICO score. This takes into account outstanding debt on installment type loans, such as a mortgage or car loan. The lower the balance becomes on these loans, the more positive effect it will have on your score. For revolving credit, like credit cards and store cards, FICO looks at how much of your available credit you're using. The lower the balance, the better. If you max out a card, it will drop your score.
Length of Credit History
The length of your credit history accounts for 15 percent of your FICO score. The older an account is, the more it will boost your score. This is why you have to be careful when closing old credit card accounts, even if you're not using them anymore because it reduces the overall length of your history. This can actually cause your score to drop, especially if the cards you close are the oldest ones on your credit report.
New Credit
New credit is 10 percent of your FICO score. FICO rewards consumers for opening new accounts. However, if you open up several new accounts at once it will have the opposite effect for two reasons. First, each new account decreases the length of your credit history and this could lower your score. Second, opening new accounts rapidly could indicate that you are having financial troubles and are trying to grab as much credit as you can. FICO considers this risky and will lower your score.
Types of Credit
The final 10 percent of your FICO score reflects the types of credit that you have. FICO prefers that you have a mix of credit types: mortgage, credit cards, car loans or personal loans. This demonstrates how well you're able to handle different financial obligations. FICO warns, however, that consumers not rush out and open more accounts just to have a better credit mix. This could actually backfire and lower your score. Only obtain credit if it's needed.
Once you determine which type of repair you want to do, you can choose from repairing the accounts you can resolve with the creditors, using a third party to take care of the accounts you cannot resolve, or using a debt management plan to get out of debt. Again, the choice is yours. Interested to know more about credit report errors? click here now.
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