Most people understand the basics, like how failing to make a payment will cause your score to go down but there are a number of complexities that trip up the average consumer. If you pay your debts on time, don’t carry too much debt on any one card, don’t close older accounts unless absolutely necessary and only apply for new credit when you have to you will generally be in good shape. However, it is important to keep yourself informed so you can maintain a credit score that accurately reflects your credit worthiness.

Here are some good tips for you to maximize your credit scores:

  • Always pay your bills on time (this should be an obvious one)
  • Periodically review your credit reports
  • Keep your debt utilization at 5 – 10% of your credit limits
  • Try to avoid new credit inquiries as much as possible
  • Be sure that you are utilizing a good mix of types of credit

When you obtain a copy of your credit report, check to ensure the information is accurate and act quickly to correct any mistakes or inaccuracies. This may include any errors, identity theft issues or incorrect information.

What Makes Up a Credit Score?

Your FICO credit score is determined by an algorithm developed by the Fair Isaac Corporation (hence the name FICO). The three Credit Reporting Agencies (CRAs) are TransUnion, Equifax, and Experian.   The CRAs gather financial data about consumers from about 10,000 data furnishers and then compile that information into a credit report.   That credit report is then sold to any company or person who has a legal permissible purpose to obtain the report.

Credit reports typically have a credit score.   While the exact formula used to calculate your credit score is a very complex proprietary algorithm, these companies provide general guidelines about financial behavior that can affect your credit score.

Payment History – 35%

Thirty-five percent of your FICO credit score is made up by your payment history.  This category is better described as the presence of derogatory information on your credit report.   This includes late payments, collections, and even bankruptcies and tax liens. Each type of account will stay on your credit report a specified period of time and each tradeline can impact your score differently.

Debt Utilization – 30%

Thirty percent of your FICO score is made up by your debt utilization.  Your debt ratio is the amount of revolving credit (i.e. typically credit cards) you owe in relation to the amount of credit you have available. For instance, if your credit limit is $10,000 and your current balance is $2,000, your debt ratio would be 20%.    It is best to keep your debt utilization ratio around 5 – 10% of the credit  limits.

Length of Credit – 15%

Fifteen percent of your FICO score is made up by your length of credit history.   Your length of credit is how long you have had credit. At face value, this seems like something you couldn’t really do anything to fix. However, there are ways you can hurt yourself here. If you close out your older cards, even if they have higher interest rates, it could hurt your score.

Types of Credit – 10%

Ten percent of your FICO score is made up by the type of credit (or mix of credit) you carry.  Types of credit include revolving, installment and mortgage loans. By having different kinds of credit open, you show creditors that you are responsible and able to handle different kinds of responsibilities.

Inquiries – 10%

Ten percent of your FICO score is made up by the number of times you apply for credit.  Inquiries are marked on your credit report when you ask for new credit (e.g. when you apply for a home loan). Inquiries made by yourself or for unsolicited offers do not count against your score but are shown on your credit report.   All inquiries can remain on your credit report for up to 24 months but only ‘hard” inquiries are calculated into your score.  Hard inquiries are typically when a lender obtains a copy of your credit report for the purposes of evaluating your report when considering an extension of credit.

For more information about credit scoring and how to improve your credit…see Illinois Credit Services

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