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5 components of your credit score


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5 components of your credit score

  1. 1. The 5 Components of Your Credit ScoreDid you recently get a copy of your credit score? Do youwant to know what the 5 components of your credit scoreare and how you can improve it?As you know, your credit score is a 3 digit number which isdetermined mathematically by each of the 3 major creditbureaus.Think of it as a kind of financial report card; the higher thenumber the better.The credit bureaus won’t reveal the exact formula used tocalculate your credit score, however they have revealed the5 major components that make up the formula.Each component is assigned a percentage which contributesto your overall scorePayment history: 35%Amounts owed: 30%Length of credit history: 15%New credit: 10%Types of credit used: 10%Now that you know what the 5 credit score components are,let’s look at how to improve your credit and increase yourcredit score with each one.Payment History: This is the most heavily weighted factorwhen determining your credit score. It makes sense that The 5 Components Of Your Credit Score
  2. 2. missed payments will affect this part of your credit score,but did you also know that late payments will to? To thecredit bureau, a late payment is viewed the same as amissed payment, even if it’s just a few days late. So if youthink that holding off your payments for “just a few daysmore” won’t hurt your credit score, it will.Do you best to make your credit card payments on time,even if it’s just the minimum required amount.Amount Owed: This is basically the amount of moneyowed vs. the total amount of available credit across all youropen credit accounts. The ideal number that the creditbureaus like to see is somewhere between 30% and 50%.So if you have $10,000 in total credit but only have $4000total owing, your debt to credit ratio would be 40%, whichputs you in a good spot with the credit bureaus.The other thing to factor in here is the number of accountsopen. You should have about 2-3 accounts to demonstratethat you are a responsible credit card holder; any more thatthis and it might look like you are over extended, which willhurt your credit score.So to recap, keep the amount of debt owed vs your totalavailable credit to under 50% and try and have at least afew active accounts so you can add positive history to yourcredit file.Length of Credit: Does size matter? The third mostimportant factor when it comes to your credit score is madeup of 2 parts; the first being the length of time since youopened your first credit account and the second being theaverage length of time your accounts have been opened. The 5 Components Of Your Credit Score
  3. 3. In both cases you want to have a few well establishedaccounts on record. So if it’s been a few years since you’veopened an account; great. Try to avoid opening any newaccounts unless you really, really have to because this willlower the average overall length of your credit accounts.New Credit: As mentioned in the previous section adding tomuch “new credit” to your account can actually hurt yourcredit score in two ways. The first being that every time youapply for a new credit card, there is a credit inquiry pulledagainst your account known as a hard inquiry which lowersyour score ever time it’s done.The second way that new credit affects your score is that itlowers the overall length of established credit on your file.Each time a new account is open the average length of yourestablished accounts drops because the new account is nowtaken into consideration.The moral of the story when it comes to new credit is this;before you apply for that new credit card offer in the mail,try reducing the amounts owed on your current accounts.You’ll free up credit and add positive credit history to yourfile at the same time.Type of Credit: The credit bureaus like to see that you’reresponsible when using credit and they like to see diversetypes of credit on your file.Having many different types of credit ie credit cards, line ofcredit, installment debt, etc gives your file some teeth. Thecredit bureaus want to see that your availing yourself totheir services but at the same time not overextendingyourself, so try and keep your balances low vs. what isavailable to you (see Amount Owed ) section. The 5 Components Of Your Credit Score
  4. 4. Now that you know the 5 contributing factors to your creditscore, you can start putting them to work for you instead ofagainst you.Here’s an idea for you; take each component of your creditscore and spend 1 or 2 months of the year improving thatsection, then at the end of the year see how much yourscore has increased.After that try refinancing some loans to see if you can get abetter interest rate; remember, the money you save oninterest goes straight to your pocket.Click Here To Boost Your Credit Score to 750+ The 5 Components Of Your Credit Score