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The Components of a Credit Score

Credit Report

Many lenders, such as banks and credit card companies use credit scores to evaluate the potential financial risk of giving a specific consumer a line of credit. A good credit score can mean lower interest rates or increased lines of credit.  Most lenders start with your FICO score, which is a numerical figure based on previous and ongoing credit transactions. There are many components that can shape the results of your score, but there are five major factors that make a big difference:

Payment History

Creditors want to see that you have a history of paying your bills on time.  Late payments will cause a score to drop considerably. In the same way, a history of timely payments will help to increase your score over time. This is often the most heavily weighted component in one’s credit score, and can be reported on by any creditor, including your cell phone company or a department store.

Length of Credit History

You may think that someone with no debt at all would have a better score than someone with a lot of debt.  It’s just not true since they have no history to review. In order to receive a good score, you need to have at least some prior transactions to be used to calculate your record of payments.

Amount of Used Available Credit

Lenders view it as a plus when you aren’t using all of the credit given to you. This may include a car payment, mortgage AND your credit cards. A consumer with more available credit typically has a higher credit score.

The Credit Mix

The mix of the types of credit that a consumer has on their report will affect their score.  Creditors and lenders prefer to see a variety of types of loans such as loans and credit cards.

New Lines of Credit and Inquires

If a consumer has recently applied for several new credit cards or lines of credit, it will show up on their credit report as a large number of inquiries.  This is a red flag for lenders reviewing your report and can decrease your score slightly.

If you are looking to improve your credit score, these are the most important factors to consider. However, it is also important to make sure the bureaus are reporting the correct information to your creditors.  Remember, you are entitled to one free credit report from each of the three major credit bureaus a year. Additionally some credit card companies are offering a free credit report even if you don’t have their card.

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