Understanding Credit

You don't just have one credit score. Credit scores vary for a number of reasons depending on the company providing the score, the data on which the score is based, and the method of calculating the score. There are three major credit bueaus who provide credit scores, Equifax, Experian, and TransUnion.

In general there are 6 factors considered in credit scoring:

Payment History

When a lender reviewed your credit report, they are trying to determine if you will make you payments and whether you will pay on time. Your payment history includes credit cards, installment loans, auto loans, student loans, unsercured loans, home equity loans, and mortgage loans.

Your credit report will show the lender details on any late or missed payments, bankruptcies, and collection information. Credit scoring models will look at how late your payments were, how much was owed, and how recently and how often you missed a payment. Payment history has a big impact on you credit score.

Used vs Available Credit

Another factor lenders and creditors evaluate is how much of your available credit - your "credit limit" - you're using. Lenders are looking to see if you are responsibly able to use credit and pay it off, regularly. If you have a large number of maxed out credit accounts, that could affect your score.

Type of Credit Used

Credit score calculations also take into account what kind of credit you have on your report, including revolving debt (such as credit cards) and installment loans (such as mortgages and auto loans). Scoring models take into account how many of each type of account you have.

New Credit

Credit score calculations may also consider how many new credit accounts you have opened recently. New accounts may impact the length of your credit history.

Length of Credit History

Credit score calculations may consider both how long your oldest and most recent accounts have been open. Generally speaking, creditors like to see that you have a history of responsibly paying off your credit accounts.

Inquiries

Inquiries occur when lenders and creditors check your credit in response to a credit application. A large number of hard inquiries can impact your credit score. However, if you are shopping for a new auto or mortgage loan or a new utility provider, the multiple inquiries are generally counted as one inquiry for a given period of time. That period of time may vary depending on the credit scoring model, but it's typically from 14 to 45 days.

How Can You Improve Your Credit Score?

Paying your bills on time. One way to make sure your payments are on time is to set up automatic payments, or set up electronic reminders. If you have missed payments, get current and stay current.
Don't get close to your credit limit. Try to keep you balances low in proportion to your overall credit limit. Experts advise keeping your use of credit at no more than 30% of you total credit limit.
A long credit history helps you score. Your score improves the longer you have credit, open different types of accounts, and pay back what you owe on time.
Be careful closing accounts. If you close some credit card accounts and put most or all of your balances on one card, it may hurt your credit score if you are using a high percentage of your total credit limit. Frequently opening accounts and tranferring balances can hurt your score too.
Only apply for credit you need. Credit scores look at your recent credit activity as an indicator of your need for credit. If you apply for a lot of credit over a short period of time, it may appear that your money situation has changed for the worse.

Why your Credit Report Matters as must as Your Score

Mistakes in your credit report could hurt your credit history and credit score, so check them regularly.

You can get one free credit report from each of the big three credit reporting companies every 12 months. Go to annualcreditreport.com or call 877-322-8228.

When you get your report, look for:

Mistakes in your name, phone number, or address
Loans, credit cards, or other accounts that are not yours
Reports saying you paid late when you paid on time
Accounts you closed that are listed as open
The same item showing up more than once

How to fix mistakes

If you find a mistake in your credit report, you many contact both the credit reporting company and the company that provided the information. Explain what you think is wrong and why. Include copies of documents that support your dispute. Your credit reports come with insturctions on how to dispute mistakes.