Have you ever wondered how you can be pre-approved for a credit card or receive an online approval within a matter of seconds? Or why some people are denied for credit while others aren't? These things are based on a credit score, a three-digit number that creditors use to determine how likely you are to pay your bills on time.
Payment history makes up 35% of your credit score. Since most lenders want to know how timely you are at paying your bills, if you pay them at all, it makes sense that payment history would account for so much of the score. Late payments, collections, and bankruptcies are included in this part of your credit score. More recent occurrences affect your credit score more adversely than older ones.
Outstanding debt accounts for 30% of your credit score. This is the amount of money you owe on credit cards, auto loans, and home loans. Also included in this part of the credit score is how close your credit cards are to the credit limit. Having credit cards close to or over your credit limit lowers your credit score; having a balance over 30% of your credit limit also lowers your credit score.
The length of your credit history is 15% of your credit score. The longer your credit history, the better your score will be. Having a longer credit history gives a more accurate view of your payment patterns. This makes it easier to predict what you will do in the future.
Inquiries made on your credit report account for 10% of your credit score. Each time you make a credit-based application, an inquiry is placed on your credit report. If you make several applications for credit or loans within a short period of time, you will have several inquiries on your credit report. This makes it seem as if you are either in financial trouble or are accumulating a lot of debt. The good thing is that only those inquiries made within the past year are included in your credit report.
The types of credit you have make up the final 10% of your credit score. Having different kinds of credit, i.e. loans and credit cards, looks better than having only one kind of credit. There is no ideal mix of credit that you should have. In fact, this factor might not be included in your credit score, if there enough other information on your credit report to compute your credit score.
Your credit score can be used for a number of things, from applying for automobile loan to getting utilities turned on and getting hired with some employers. Knowing the factors that make up the credit score equips you with the information necessary to maintain a good score.
