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Credit Score Secrets

Most lenders look at your credit score to determine your credit worthiness. There are five factors used in establishing a score for you. Fair, Isaac & Co. pioneered the credit score 40 years ago. Until recently, exactly how your credit score was determined was a mystery. Pressure from recent consumer group and lending institutions have opened a portal into how the score is determined.

Here are the five factors that count:

  1. Payment History (about 35 percent of total score):
    Payment history on all outstanding debt is a big factor of your score. Specifically, how late your payments were, how much was owed, how many late payments you've had and how recently they occurred. If you have a number of accounts and most show no late payments, your score will improve. According to Fair, Isaac & Co., a 30-day late payment made just a month ago will count more than a 90-day late payment from five years ago.
  2. Amounts Owed (about 30 percent of total score):
    Your score will not necessarily be harmed by large outstanding balance amounts. More important is how many accounts have balances and how much of the total credit line is being used on credit cards or other revolving credit accounts.
  3. Length of Credit History (about 15 percent of total score):
    The duration of your credit accounts is important. Establishing a credit record at an early age could help in the process of establishing a good credit history. Applying for a Secured Visa® would be a great start and opportunity for your child just heading out to college.
  4. New Credit (about 10 percent of total score):
    Although this only applies to 10 percent of your score, applying for too much credit is probably one of easiest ways for you to harm your score inadvertently. Fair, Isaac & Co. looks at how many new accounts have been established, how long it has been since you opened a new account and how many recent requests for credit have been made by credit reporting agencies. According to Fair, Isaac & Co., if you request a report from a credit-reporting agency, (such as Equifax, Experian or TransUnion), this does not count against you. Finally, until recently, each credit inquiry by a lending institution would be counted. They now lump together reports that are pulled within a short period of time, going on the assumption that you, the consumer, are shopping around.
  5. Types of Credit (about 10 percent of total score):
    This considers your mix of installment loans, mortgages, retail accounts, credit cards and finance company accounts. Fair, Isaac & Co. is vague on how it weighs the mix of account types. It does indicate this factor may be given less weight if there is full information from the other four factors.
    • When the credit bureau delivers your score to a lender, the score is accompanied by a reason code, which explains what factors lowered your score. As an example, a reason code might be "number of accounts with delinquency." The reason code will indicate where you can work on improving your score.
    • Before applying for any loan, you can obtain and review your credit report.

    To order a copy of your credit report, contact one of the credit bureaus such as Experian. You can order a FREE credit report annually by calling 1.888.Experian/1.888.397.3742 or contact them online. Click Here

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