Understanding Your Credit Score(Article)

Your credit score. It’s the magical number by which all future loans and credit cards are approved. It reveals to creditors your spending habits and how well you make your monthly payments. It can put you on the nice list or it can send you down the naughty list. It can also get a little confusing if you have a perfect payment history and still have a low score. After all, you make consistent payments every month.

The truth is that your credit score has three key components that create the final number. The first is your payment history. Payment history accounts for 35% of you credit score. Creditors use this information to ensure they will be paid back the money they loan you on a consistent basis. Any discrepancies on your payment history will raise red flags to creditors.

Debt-To-Credit ratio makes up another 35% of your credit score. This is one is not largely known because it’s drilled into the American psyche that creditors only look at your payment history. Debt to credit ratio is determined by dividing all of your current debt to the total amount of credit you have. So, if you have a line of credit that totals $15,000 and you have used $8,500 of it you have a debt to credit ratio of 56.66% ($8,500 / $15,000 = 56.66%).

If you find that your debt to income ratio averages in the 43%-49% range, beware that this could raise red flags to creditors. If you are over 50%, then you are considered a high risk for a loan. However, it should be noted that some creditors could take you mortgage into account when determining your debt to credit ratio.

The final 30% of your credit score comes from credit what we like to call a credit portfolio – new credit (10%), length of credit history (10%) and types of credit (10%), New credit is basically what new credit lines you have successfully opened and how many applications you completed. Completing too many credit card applications could send a red flag to creditor as they could possibly see this as a form of desperation to get money.

Creditors also like to see that you have a long credit history. It shows that you are not afraid of commitment. And, if you ever do decide to shut down an account, make sure that it is a recent one. One of the lesser known secrets is that once you shut down an account, it is disappears forever. It’s like you never had it in the first place. Closing accounts, however, have advantages and disadvantages. You could shift your debt to payment ratio to work for you or against you. You could also, potentially, close out an account with a pristine payment history and, if you have one that is not so pristine, that one would be the one that creditors look at.

Finally, creditors want to see that you have diversified your credit. If you have a credit card, a department store charge card, along with an auto and/or mortgage shows that you can manage more than just one type of credit.

Now that you know how your credit score is calculated, the mysticism behind it doesn’t seem so grand. Also, it will give you a better understanding of your credit report. You should also know that if you believe there are any discrepancies on your credit report you can dispute them with you creditor. More often than not, creditors are happy to help fix mistakes.