Your credit score is probably the most significant three-digit number in your life, according to MSN Money. Luckily, there are simple ways you can improve your credit score each month. The three major credit bureaus use software created by the Fair Isaac Corporation to assess your credit risk. The calculated result is your FICO score. One of the largest factors affecting your score is your payment history.
Payment History
Payment history is the largest factor affecting your FICO score. When you pay your bills on time, you demonstrate to creditors that you are able to honor your payment agreements. Delinquent payments reflect an irresponsible use of credit and increase your risk as borrower. Payment history makes up 35 percent of your credit score.
Amount Owed
The second largest factor affecting your FICO score is the amount you owe. You can pay your bills on time each month, but if your credit card is maxed out, your score will suffer. Creditors seek consumers who borrow what they can afford to repay. Maintaining balances on your accounts over the long term reflects an inability to manage your credit. Keep balances below 30 percent of your total available credit to help improve your score over time.
Length of Credit
Creditors report to credit bureaus on a monthly basis. Each time an account is paid on time, your FICO score goes up. As this process repeats over time, the your length of credit history develops. Length of credit history means you have an extensive track record of managing loans and/or credit.
New Credit
New credit inquiries can lower your FICO score. Once you are approved for new credit, the amount of credit you have available to you, however, can help increase your credit score. This is because your credit utilization ratio decreases. For example, if you have a credit card with a $500 limit and a $300 balance, your credit may suffer each month even if you pay as agreed. Obtaining a new card with a $1,000 limit, however, lowers the ratio of amount owed to the amount of credit available.
Types of Credit
Consistently repaying mortgages and car loans have a greater impact on your credit score than paying on retail cards or equipment rental. Keep in mind that some creditors do not report to the credit bureaus each month, so you don't get the benefit of paying those bills. Such creditors may adversely affect your credit score, however. For example, if your cell phone provider does not report to credit bureaus, but you fail to repay a debt to your cell phone company, it may send your account to collections. Collections accounts lower your credit score each month until the debt is repaid.
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