How Credit is Calculated and Industry Tips to Increasing Your Score
Here are the factors that are involved in the credit score algorithm:
- Your payment history
- Your credit utilization
- Length of credit history (& age of accounts)
- Public Records
- Credit Inquiries
Your Payment History
It is very important to make all of your payments on time. Additionally, if you pay a credit card bill in full before its due date, you actually won’t be charged interest at all! However, making at least the minimum payment, even if you can’t pay it off in full, is always the best choice when talking about your credit rating. Always understand the credit facilities that you have.
Our tip: if you regularly carry a balance on your credit cards, pay each of your cards at least a little every payday! Making regular payments makes sure to save you from accidentally paying a day late.
Credit Utilization
Utilization means the balance reporting on your account in relation to the total limit on the credit line. This is a ratio game, so the lower your ratio, the better your credit score. The algorithm loves 3% utilization, but your score will drop if you use 10%, 30%, 60%, and 90%. Being over the limit on a card will affect you the most.
Our tip: accept the offered increased credit limit on your card (if you’re comfortable doing so, ONLY IF you will use it responsibly). If you always use $500/month on your $1000 limit card, increasing the limit from $1000 to $2000 will automatically lower your utilization from 50% to 25% – giving you a credit score increase on the next billing cycle!
Length of Credit History
Length of accounts means the length of time each of your trade lines have been open (credit card, overdraft, car loan, etc). The longer an account is active, and the longer your positive reported credit history in general, the better your score will be.
Our tip: if you have a credit card with no annual fee that you no longer want, just stop using it. Don’t cancel it. Canceling accounts, especially your oldest account, can lower your score.
Public Records
Public records are charges and securities that are flagged on your bureau. These can include collections and bad debts.
Our tip: Pay off collections the moment you hear about them! Collection companies can often work with you to get things paid off. The sooner they’re paid, the sooner your score will go back up.
Credit Inquiries
The smallest factor in your credit score is the number of inquiries. It affects the algorithm by about 10%. Applying for multiple credit cards can hurt your score. Some loan applications, such as mortgages, if pulled multiple times in a certain time frame won’t hurt your score because they’ll all be considered one pull.
Our tip: if you’re getting ready to apply for a mortgage, don’t apply for any new credit cards, loans, etc.
Don’t forget, your broker or agent has direct contact with Equifax and TransUnion. If you need help fixing your bureau, or if you have questions about your credit score, reach out to your broker or agent today!
For more information on how to build/fix your credit score, click here.
