Anyone who has ever taken out credit has 3 FICO scores and credit histories that show every credit card or loan they ever taken out and the payments they made and the ones they may have missed. All the information from your credit histories are put together to create your credit scores. There are 3 different companies (Experian, Transunion, Equifax) that each create a separate credit score, from your credit histories.
Understanding what makes up your FICO scores is important so you can have the power to get the best interest rates on loans and credit cards. Knowing areas that can most influence your credit scores give you the power to take charge and change your scores.
There are 5 Factors that influence your credit scores:
1.) Payment History, 35% – The number one factor that influences your score is your payment history. Missed payments have the worst effect on your score. At the same time, on-time payments are the best way to increase your score when you need to raise your score.
2.) Amount of Debt Owed, 30% – The second most important is the amount of debt you owe, to credit cards and loans. More importantly your credit to debt ratio. Credit to debt ratio is the amount you owe in relation to the amount of credit you have available. If you have a credit card with a credit limit of $8,000 and you have used $4,000 of your limit, then your credit to debt ratio is 50%. It is best to not lower your credit limits; if you do, it could lower your FICO, by increasing you credit to debt ratio. You should also try to keep your credit to debt ratio at about 36%, at the very most 50%. Paying down debt would be the best way to do that, but not always the easiest. By spreading balances to several cards, instead of one or by increasing your cards credit limits, you can lower your credit to debt ratio and increase your credit score. Keeping unused credit cards open, instead of closing them, will keep your credit up and your debt ratio down.
3.) Credit History, 15% – The length of time you have had your accounts increases your FICO score the longer you have had them open. Because of this, you should not close old accounts. Closing old accounts will lower your FICO scores, by shortening your credit history. It is better to keep them open, even if you don’t use them. Many lenders try to convince people to close accounts, but that is not a good idea if you want to keep your credit score up. If you really have a hard time not using your credit cards when they are open, you can always cut them up or put them in a block of ice in the freezer, to make it hard or next to impossible to use them and still keep them open.
4.) New Credit and Inquiries, 10% – Any time you apply for credit, it is counted as an inquiry and lowers your credit score, a little. It is best to not have your credit pulled by others, except only when you need to. The good thing is, if you are shopping for a car or a home you can have your credit pulled several times, within a 14 day period, and it will only count as one inquiry.
5.) Type of Credit, 10% – The number of accounts, credit cards, mortgages, loans, etc. all have an affect on your score. Having a mix of types of credit is best overall.
Keeping track of what is on your credit history is the best way to take care of any issues that can affect your FICO score. By law you can get a copy of your credit history, from each of the credit bureaus once a year, by going to: annualcreditreport.com. The free report only includes your history and not your credit scores. Each credit bureau has a different credit score and sometimes a slightly different history. You may find one account on one report and not on the others. That is why it is best to check all three reports.