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Understand factors affecting your credit report

By Andy Snyder
Published: Wednesday, January 13th, 2010

The credit score is based on a number of factors, but before going into that let’s try and define the credit score. The credit score is a three digit number which defines how credit worthy you are. It is basically based on the credit report.

The credit score was first developed by the fair Isaac and company, a company which records all the credit information of people. The credit score was previously not available to the public, but after a lot of lobbying by the members of congress it was finally decided that the score would be made available to all on request. This is very helpful as one can order the report and then decide how to change ones financial habits in order to improve the credit score.

About 35% of the score is based on your credit history. It basically depends on the promptness you have displayed in paying off your dues. Things like extending the deadline of repayment will adversely affect the score. And this is not to mention late payments or failure to pay the dues. These will really affect your score in such a way that you might not even be able to get a loan. Defaulting on payment is a sure way of ensuring that you will not get a single pie in credit for the rest of your life!

Outstanding debt accounts for 30% of your credit score. This includes the loans that you currently hold. Like a loan on your car or education which is still current and not completely paid off. It also includes things like how many credit cards you hold that are at their credit limits. Having a lot of cards at their limit will be a bad idea. Make sure each of your card is at lower than 25% of its limit.

And then comes the age of your credit history. The older the credit card you own, the greater your score on this front. Around 15% of your score depends on how old your credit history dates back to. So obviously, someone who is older and working for a longer time will have a better score here than a newbie who has just started earning.

10% is based on new credit. That is the new accounts or credit cards that you have opened. Opening new credit card accounts will badly affect your score. Do not open one if you intend to take out a loan in the near future or if you intend to make a purchase based on EMI.

Lastly, 10% of the score depends upon the mix of credit accounts that you hold, like revolving credit accounts and investment loans etc. having a greater mix is always better. It shows that you are well experienced with different types of credit accounts and this helps the creditors believe that you are ready to handle new credit easily.

That was a vague idea of how the credit score can be broken up. But it all boils down to how well you manage your money and expenditure.

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