| A person's credit score, often referred to as their | | | | perception is that someone who has owned a credit |
| "FICO" score, is an important tool that lenders use to | | | | card for twenty years is more likely to be responsible |
| help determine the creditworthiness of a potential | | | | and credit worthy than a young person right out of |
| borrower. If you want to make a large purchase, such | | | | high school who has the same credit card. Although |
| as a house, for which you will need financing, you want | | | | this is true generally, it is certainly not always the case; |
| your score to be as high as possible. To understand | | | | that is why it is weighted significantly less than |
| how to improve your overall credit rating, it is | | | | payment history and the debt to credit ratio. |
| imperative you understand what factors influence your | | | | New Credit |
| FICO score. | | | | If you have one credit card for ten years, and then |
| Payment History | | | | you apply for and receive three more credit cards, |
| Do you pay your bills on time? Most creditors, lenders, | | | | expect your credit score to come down a bit. A |
| and service providers will charge a fee if you do not. | | | | long-established credit account is considered more |
| Obviously, the biggest thing wrong with that is the | | | | stable than a new account. Of course, how your credit |
| egregious waste of money. What is worse in the long | | | | score reacts to new credit is also affected by other |
| term is that after 30 days of nonpayment, the lender | | | | factors. A new card will increase your total credit line, |
| will likely report you to one of the major credit bureaus. | | | | thereby reducing your debt to credit ratio. An old credit |
| (In the U.S., there are three such credit bureaus: | | | | account with a poor payment history is worse than a |
| Experian, Equifax, and TransUnion.) Considering that | | | | new account in good standing. All things being equal, |
| thirty-five percent of your credit score is based on | | | | new credit is not bad, but old credit is very good. New |
| payment history, it becomes clear how important it is | | | | credit accounts for ten percent of your FICO score. |
| to keep up with your financial obligations. No other | | | | Unused credit is considered very much like new credit. |
| single factor has that much influence on your FICO | | | | If you can use a credit card every month, and pay off |
| score. | | | | the balance in full every month, you will see your credit |
| Debt to Total Credit | | | | score increase steadily. This is difficult for many |
| The ratio of your outstanding debt to the total of your | | | | people, because of the temptation to overuse the |
| credit lines and loan amounts counts for thirty percent | | | | credit card. Responsibility and restraint are critical when |
| of your credit score. For example, if you have a credit | | | | using this technique. Remember that, even though |
| card with a limit of $5000, and you owe $4000, your | | | | unused credit is not very good, it is not at all bad; |
| debt to total credit ratio is eighty percent. After paying | | | | overused credit is. |
| down $3000 of the principle, your outstanding balance | | | | Types of Credit Used |
| is $1000, giving you a ratio of twenty percent, which is | | | | The remaining ten percent of your credit score is |
| much better. | | | | based on what type of credit you have used. A retail |
| If your outstanding balance occupies seventy percent | | | | store credit card is not very good. Too many of them |
| or more of your total credit line, it is viewed negatively | | | | could be bad for your credit score, in fact. Small loans, |
| by the credit bureaus. If the ratio is in the range of | | | | if paid off in a timely manner, have a positive effect. |
| thirty to seventy percent, it is doing little or no harm to | | | | Major credit cards are even better. Big ticket items like |
| your credit score; however, it certainly is not helping | | | | auto loans and home mortgages are very good, once |
| your credit score. Bring your debt to less than thirty | | | | again provided that you make the payments on time. |
| percent of your total available credit, and your FICO | | | | These five areas are the basis for your FICO score. |
| score will very likely improve. Getting balances and, | | | | Armed with this knowledge, you are better equipped |
| therefore, debt to credit ratios down to zero is clearly | | | | to make the changes necessary to improve your |
| a desirable goal. It is important to remember, though, | | | | credit score. An overwhelming majority of lenders will |
| that unused credit will not help your credit score. We | | | | use your FICO score when considering your |
| will explore that topic a bit later. | | | | application. Put yourself in position to get the best |
| Length of Credit History | | | | possible deal. Read this article again, and then get |
| Fifteen percent of your FICO score [ is based on how | | | | started! |
| long you have had some type of credit. The | | | | |