Credit Scores

Credit reports use a scoring model to quantify the likelihood of a consumer to pay off debt without being more than 90 days late at any time in the future. An individual’s credit score can determine whether that individual is granted a lease for an apartment or his or her likelihood of securing a loan and how high the interest rate will be.

Credit scores range from 300 to 850. The higher the score, the lower the interest rate for the consumer. Only 1 out of 1,300 individuals in the United States has a credit score above 800.

The Five Factors of Your Credit Score

Payment history comprises the largest portion of your credit score.

• Payment history makes up 35% of your credit score. Paying debt on time and in full will have a positive impact on a credit rating. Late payments, judgments, and charge-offs have negative impacts. Delinquencies within the last two years carry more weight than older items.
• Amount owed/outstanding credit card balances makes up 30% of your credit score. This percentage is calculated by comparing the outstanding balances on credit accounts to the amount of overall available credit. Ideally, credit balances should be kept near 0 and definitely below 30% of the available credit limit (especially 2 to 3 months prior to a major purchase such as a car or home).
• Credit history accounts for 15% of the overall credit score. A credit history refers to the length of time since a credit line was established. Older, well-maintained credit lines have a positive impact in this area.
• The type of credit you have accounts for 10% of your credit score. A mix of auto loans, credit cards, and student loans has a more positive impact on the overall score than credit card debt alone.
• New credit/credit inquiries account for 10% of your credit score. This is made up of the number of inquiries on a consumer’s credit within a 12-month period.  Each hard inquiry can cost from 2 to 25 points on a credit score. If you pull your own credit report, it will have no effect on your score.

Tips to Improve Your Credit Score

• Don’t fall behind on existing accounts. One 30-day late payment can cost you from 30 to 80 points.
• Don’t close credit card accounts. When a credit card account is closed, it will appear your debt ratio has gone up. Closing an account also affects the length of your credit history.
• Don’t max out or overcharge your credit accounts. Maxing out credit accounts is the quickest way to drop a credit score by 50 to 100 points.
• Don’t consolidate all your debt onto one or two cards.
• Do check your credit report for accuracy on a regular basis.