Here are the five factors that are used in credit scoring, with the percentage each factor plays in determining your total score.
Payment History – 35%
Paying your bills on time is the most important factor, because it tells a lender how you are handling the credit you currently have. If you have late payments or are struggling to catch up, contact your creditors to work out a payment schedule. Be aware that paying off a collection account will not remove it from your credit report…it will stay on your report for seven years.
Amount Owed – 30%
How much you currently owe in relation to your available credit is almost as important as your payment history. You should keep at least 3 credit lines open, but it's a good idea to keep balances below 25% of your available credit because having available credit can help your ratio of debt to credit. Even if you pay everything off each month, a high average balance can negatively impact your credit score. If pay off and stop using a credit line they may no longer consider it, which could also negatively impact your debt to credit ratio.
Length of Credit History – 15%
Generally speaking, the longer your credit history the better your score in this area. That is why it is usually not a good idea to cancel old credit cards and get new ones.
Pursuit of New Credit – 10%
This can tie in with the length of your credit history, creating a double negative when you apply for numerous new credit cards. Every time a lender runs your credit, an inquiry is recorded. If you are applying for a loan, don't apply for new credit cards first. If you are applying for an auto loan or a mortgage, group inquiries close together. A group of multiple inquiries within 14 days of each other are treated as one, because it likely represents a search for the best rate on a single loan.
Various Types of Credit Experience – 10%
Although not normally a key factor in determining your credit score, it can make a difference if your score is close. What types of accounts you have, and how many can have a big impact but the optimal ratio depends on your profile and varies from person to person. It is good to have a healthy mix of installment loans, retail account, credit cards and mortgage. The factor that seems to carry the most weight in this category is your percent of open installment loans…too many can lower this portion of your score.
Tips for improving your credit score
Everyone is entitled to one free credit report per yearfrom each of the three credit bureaus…Experian, Equifax and TransUnion. It is common for reports to have mistakes or incorrect information, and a good place to start is checking your report and repairing any errors. Then make sure to pay your bills on time, keep your balances low and only apply for credit you need.