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Where your Credit Score comes from

By George Hauser
Published: Tuesday, November 3rd, 2009

Before you can even think of ways to increase your credit score, you should know first what makes up this three digit number. Many credit score tips will guide you along the ways to improve your credit standing. However, you will surely have difficulties understanding and applying them if you are not aware of how your credit score is calculated in the first place. 

The way credit scores are calculated nowadays has not always been the same. That’s why you need to know about the changes credit bureaus implemented in scoring. In fact, one of the credit score tips would advise you to be up to date with what’s happening in the world of credit and how new things affect the financial aspect of your life. 

Most people think that everything in the credit report is used to come up with the credit score. This is not entirely true, though the credit report is the one thing credit bureaus rely on for information. With this, most credit score tips also center on regularly checking your credit report, especially so that you can file disputes if needed. 

Here are the following changes made in the calculation of your credit score: 

Payment History

Before, your credit history makes up 35% of your credit score. But in 2009, the damages of not being able to pay on time do not hurt as much anymore. However, that’s only if you miss out on few occasional payments, but generally still pay on time. If you look across different credit score tips you’d see that they all mention making regular and on-time payments. Credit history also includes all the late payments you have made that before you filed for a foreclosure or short sale on your credit. 

Amount Borrowed compared to Available Credit

You will see this in your credit report, and it is of great importance that you keep the amount of revolving debt you owe low in relation to your available balances. This is calculated for each of your accounts and also for overall basis. This figure has greater impact on your credit score. One of the credit score tips you can use is to never borrow 50% or more of your available balance in a single lender. Moreover, if you must you should only be borrowing 33% of your available balance. In other words, it’s better to borrow small amounts from different lenders than to max out on one account. 

Length of credit history

Another determiner of your credit score is the length of time you have managed to keep your accounts open. One of the credit score tips that can help you increase your credit score is to keep your accounts open over seven years. The longer you have them open, the better as the length of credit history accounts for 15% of your credit score. Don’t close accounts rather work to pay them off. 

Inquiries and New Debt

The total number of inquiries and new debts on your credit report will make up the 10% of your credit score. If you want to maintain your credit score or improve it, you should lessen the amount of inquiries you make and the number of new debts you get into. 

Type of Debt

Finally, 10% of your credit score comes from the type of debts you have. It would increase your credit score if you have more installment debts, such as loans, rather than revolving debts like credit card debts. However, if you can manage, you should be using both kinds.

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