The Five Factors of Credit Scoring


Your credit score is a major factor when lenders decide how much money they will lend you--be it a home loan, credit card or other line of credit. Here's what you need to know about credit scoring.

Credit scores are comprised of five factors. Points are awarded for each component, and a high score is most favorable. The factors are listed below in order of importance.

1. Payment History - 35% Impact

Paying of debts on time has the greatest positive impact on your credit score. Late payments, judgments and charge-offs all have a negative impact. Delinquencies that have occurred in the last two years carry more weight than older items.

2. Outstanding Credit Card Balances - 30% Impact

This factor marks the ratio between the amount owed and the remaining available credit. Ideally, the consumer should make an effort to keep balances as close to zero as possible, and definitely below 30% of the available credit limit.

3. Credit History - 15% Impact

This portion of the credit score indicates the length of time since a particular credit line was established. A seasoned borrower will always be stronger in this area.

4. Type of Credit - 10% Impact

A mix of credit, such as an auto loan and a credit card, is more positive than a concentration of debt from only credit cards.

5. Inquiries - 10% Impact

This percentage of the credit score quantifies the number of inquiries made on a consumer's credit within a twelve-month period. Each new credit inquiry can deduct points from a credit score. Note that personal credit inquiries do not impact scores.

Remember that the credit score is a computerized calculation. Personal factors are not taken into consideration when a credit report is generated. It is merely a snapshot of a credit profile and can fluctuate with time.

Unfortunately, bad credit scores are mostly a result of late or unpaid and outstanding bill payments. Of course, there are exceptions when unforeseen circumstances come into play, such as health complications or loss of employment. Keeping the five factors in mind will help you manage your credit activities for higher credit scores

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