Your Credit Score

How is your credit score calculated?

The exact formula for calculating credit scores are closely guarded secrets. The following components are the approximate weighted contributions:

  • 35% – Punctuality of payment in the past (only includes payments later than 30 days past due)
  • 30% – The amount revolving debt (credit card balances, etc.) as a percentage of total available revolving credit (credit limits)
  • 15% – Length of credit history
  • 10% – Types of credit used (installment, revolving, consumer finance)
  • 10% – Recent search for credit and/or amount of credit obtained recently


Increase Your Credit Score

1. Check your credit report for accuracy. 
You can get a free credit report at FreeCreditReport.com. You are entitled to one free copy per year. Errors are maddeningly common: Over 25% of reports contain errors that are serious enough to result in the denial of credit. Be sure to report any inaccuracies to all three credit-reporting agencies: TransUnionEquifax, and Experian.

2. Pay your bills on time
Missed payments are the single biggest killer of credit scores. Your past behavior – late or missed payments, foreclosures, bankruptcies etc. count for approximately one-third of your credit score.

3. Pay down balances
One-third of your credit score is based on the amount you currently owe in relation to your credit limit. Try to keep your balances at 50% or less of your credit limit.

4. Keep old lines of credit open
15% of your score comes from how long you’ve been managing credit. Closing old accounts shortens your credit history and lowers your score. Lenders also take into account the average age of your accounts, so an older account can help balance newer credit.

5. Limit new credit 
Take on new credit only when you need it. New credit can hurt your score twice. For starters, new inquiries for credit count for 10% of your score – and a flurry of new credit requests can lower your score. Also, once a new credit line is secured, the average age of your accounts will shorten, which in turn can drag down your score even more.

6. Communicate with your creditors if you have difficulties
Many creditors are willing to be understanding of difficult financial situations and short-term financial problems, especially if you openly communicate with them in a timely manner. Forcing a creditor to turn your debt over to a collection agency will simply cause you bigger problems because collection agencies are relentless when it comes to recovering money. And the negative information that’s placed on your credit report will have a long-term negative impact on your credit score. Your creditors may be willing to do one or more of the following things to assist you:

  • Reduce the interest rate
  • Reduce the monthly minimum payment
  • Waive extra finance charges and late fees
  • Allow you to skip one or more payments (and extend the length of the loan)
  • Close the account and allow you to make affordable payments to slowly reduce the outstanding balance over time.
  • Close the account and accept a settlement for less than the amount you owe
  • Allow you to refinance the loan at a lower interest rate and/or for a longer term to reduce your monthly payments.

7. Goodwill adjustments
A single late, or overlooked payment can affect your credit score for years. A goodwill adjustment is a gesture from a creditor to re-age an account and report certain late payments as having been made on time. It is entirely up to the creditor – so you need to ask nicely :)) Here is a sample letter you can use. 
8. You’ve got a second job…
Yes, you do. It pays well, no taxes, and you don’t even have to apply for it. It is also slave labor because if you don’t work at it you can get punished. I am talking about managing your credit score.

 

What to look out for…

The first step in fixing credit report errors is to identify what’s wrong. Consumers have to obtain a copy of their credit report (everyone is entitled to one free report per year from each of the three credit bureaus: Experian, Equifax, and TransUnion) and review it for accuracy. Look for: 

  • Late payments. There should be no late payments over seven years old on the report. This is important, as approximately 35 percent of a credit score is based on timely payments.
  • Collections. The report shouldn’t show any collections or charge-offs more than seven years old. It’s a good idea for consumers to save copies of their credit report for seven years so they have proof of when an item was added. 
  • Payment records. All paid-in-full installment loans and all collections that have been paid in full or settled for less than the amount due should show a zero balance. Sometimes collections are not updated after they’ve been paid or settled. 
  • Mysterious accounts. Consumers should be able to recognize all accounts listed on the report. Incorrect accounts do sometimes appear, either by mistaken identity or by identity theft. Consumers should contact the creditor immediately to compare their name and Social Security number with the one shown for the incorrect amount. In the case of an incorrect collection, consumers may have to request a “validation of debt,” or what is sometimes called a “media packet,” which provides details on the account holder. If the account is a case of identity theft, the consumer should request a fraud affidavit from the creditor. It’s also a smart idea to file a police report. 
  • Original dates. Length of credit history is 15 percent of a credit score, so consumers should be sure the original dates they opened their accounts are accurate. Original account dates could be reported inaccurately if a credit card company is acquired or merged, or if a credit card is reported lost or stolen. 
  • Available credit. Credit limits on the credit report should match up with credit card statements. It’s best to keep balances under 50 percent of the available limit; less than 30 percent is even better. Debt accounts for 30 percent of your score. 
  • Types of accounts. Sometimes accounts are not categorized correctly. A home equity line of credit should be listed as a second mortgage, not just a line of credit. If the account type is not reflected properly, consumers should contact the creditor. 
  • Reason codes. Consumers should read what the credit bureau has to say about why their score is what it is. These so-called “reason codes” appear in the credit report to explain what factors played into the credit score and what actions can be taken to improve the score over time. One caveat: If a consumer already has a good credit score, ignore the reason codes, as making changes could actually result in a lower score.

 
One last word of advice for consumers: Think twice before closing that credit card, which shrinks the available credit listed on your report and hurts the credit utilization ratio.