Without knowing all the factors that make up a credit score, how do you keep your credit score good? Many credit report bureaus are not up front about what the determining factors are in formulating your credit score. There are 5 factors used to determine your credit score.
The first factor is payment. One late payment can take an excellent credit score down one hundred points, possibly taking you into a lower credit score range. It doesn’t matter that you’ve had 20 years of excellent payment to that calculation. The best thing to do is make all your payments on time. If you are late for some reason, try to make it up within 30 days. That will lesson the negative effect of the late payment. After 30 days though, the negative effect can be horrible. Your payment history makes up a whopping 35% of your credit score. It is the highest percentage factor and is very important to keeping your credit score good.
The second highest percentage factor, at 30%, is amount owed. Credit report bureaus compare your amount of debt versus the amount of credit you have. Fair Isaac, the company that determines your FICO score, says that you should never owe more than 35% of what you have in credit. So if the amount of credit you have access to is $1000, then you should never be in debt past $350 of it. Keeping this rule will help your credit score immensely.
The third highest factor is longevity of credit accounts. At 15%, your long term account histories can only make you look good if you’ve kept them maintained well. It shows long term commitment as well as long term responsible behavior. Your average length of credit shows a lot about your financial behavior. If you were to close down on of those long term accounts, its long positive report will no longer affect your credit score and could cause it to slip.
Also, if your long standing credit card is closed, applying for a new credit card will cause a dip in your credit report. So you’ve just added removed a positive report and added a negative one, not a good way to keep your credit score good.
This is where your fourth factor comes in to play. Recent credit factors 10% of your credit history. Every time you apply for more credit it is reported to the credit bureau, even if you are denied. If you apply for multiple new lines of credit, your credit report shows that and it throws up a red flag for creditors. They will be afraid that you may be getting in over your head and be unable to maintain your payments.
The final 10% factored is types of credit. You want to be sure you have revolving, installment, and basic forms of credit. Revolving credit has no set number of payments and generally includes credit cards and loans such as home equity loans. Installment payments do have a set number of payments and include most loans.
Knowing these factors and a copy of your credit report should allow you to keep your credit score good.