What Affects Your Credit Score?

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Knowing what factors affect your credit score is a bit like knowing what questions will be on an important exam. If you know what will be asked, you will know where to focus your studying efforts. It is the same with building your credit. If you know what things are important, you will know where to place your energies, and the sooner you get started, the better off you will be.

If you want to build or rebuild your credit, you will need to know exactly what determines your credit score. This guide will provide you an overview of what is important.

Payments

When you make a credit card or loan payment, a notation will be added to your credit report. If you make the payment before the due date or within the grace period, a positive mark will appear on your report. If the payment is late by 30 days or more, a negative notation will appear. To build a positive credit score, you want to make all of your payments on time. If you are often late, you will never build the positive credit required for a high score.

Debt

The total amount you owe creditors will also impact your credit score. Most analysts suggest a balance of no more than 30% of your credit limit, which means if you have $10,000 available on your credit cards, you do not want to carry a balance higher than $3,000. This not only applies to your total balance but also your balance on individual cards. Thus, if you have one credit card that is maxed out and three others with no balances, you may want to consider transferring your balance to the other cards to spread out your debt.

Debt utilization shows how reliant you are on your credit cards. If it looks as if you are using your lines of credit to survive, lenders have little confidence that you will gain financial stability. Credit card issuers will be hesitant to loan you more money, because they may fear that you could instantly max out the new card. If you keep your debt levels low, you will be offered more credit opportunities.

Types of Credit

Some forms of credit are more valuable than others. Generally, secured lines of credit, such as mortgages and car loans, are better than unsecured lines of credit, such as credit cards. For secured loans, there is less risk for the bank and more responsibility required from you, which will help boost your credit score. It is important to maintain a versatile loan portfolio, as it will give future lenders something to reference.

Time

The longer you keep credit accounts open, the more benefit they will have on your credit score, but this only applies if you are maintaining a positive payment history. A long history of late payments will lower your score.

Since you want to have accounts open for as long as possible, you probably do not want to cancel credit cards that you are not using. If you keep them open, even if they are unused, you can demonstrate a long history with a credit card company. While new lines of credit can temporarily lower your score, they will eventually help you if you keep them open. Thus, try to keep accounts open for as long as possible.

Inquiries

Whenever you request a new line of credit, the company will look at your credit report, and you will receive a mark on your credit. While one or two inquiries a year are expected, a larger number can decrease your score considerably. Often, this happens when people apply for attractive offers they receive in the mail, as they want to take advantage of the incentives offered. It can also occur when consumers are shopping for a car, as dealers may send their applications to multiple lenders. This will create many new hits on their credit.

To maintain a high credit score, you will want to limit the number of credit applications you fill out. Look for a card that fits your needs and credit history and apply only for that one. If you need another card six months later, try again then. Additionally, in lieu of shopping around for mortgages and car loans, speak with lenders in advance to see if they would be willing to lend you money. This will limit the amount of times your credit report is pulled.

How Long Before Changes Show Up?

Most companies will not report changes on an individual’s credit report for at least 30 days, but some may take as long as three to six months. Thus, if you make changes to your credit situation, do not expect to see the benefits immediately. Knowing what benefits your credit score does not mean you can transform it overnight. You will need to wait for the credit bureaus to catch up. It is best to assume your credit score will not improve for several months after you have made a positive change.

Improving Your Score

The keys to creating a high credit score are making positive payments and maintaining minimal balances. The best advice is to use your credit cards regularly, but do not rely on them to survive. You should aim to pay off purchases within a short period of time, and if you cannot do that, you may want to rethink the purchase. Get the right kind of credit accounts and maintain them for long periods of time. Then, your score should increase.

About Bill Hardekopf

Bill Hardekopf is the CEO of BillSaver.com and covers the credit card industry from all perspectives. Bill has been involved with personal finance for over 15 years. He is a frequent contributor to Forbes, The Street and The Christian Science Monitor.
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