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Building a Better Credit Report - Part 1

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Understanding & Building a Better Credit Report - Part 1

What is a Credit Score?

A credit score is a number used to estimate how likely you are to make your credit payments on time, in other words, your credit-worthiness. A credit score is a numerical rating earned by every consumer, and falls within a range between 300 and 850. This score tells lenders how much of a risk you are when you apply for credit. You may also hear your credit score referred to as a “FICO” score or a Beacon score.

What Determines My Credit Score?

There are five parts to your credit score: your payment history, your total debt, extent of your credit history, your amount of new credit, and additional factors.

  1. Payment history factors 35% of your score, the highest percentage rate of the five parts. That is why it is imperative to pay your bills on time.
  2. Total debt factors 30% of your score. The number of credit accounts you have open is reviewed. This includes credit cards, vehicle loans, mortgages, and student loans when they are in repayment status. Student loans that are in a deferred status show on your credit report, but will not be included in calculating your credit score. What are the balances for each account? If you have five credit cards, but only have a balance on two cards, the remaining three zero balance credit cards are still used to calculate your available credit, which is the current line of credit. To calculate your available credit on the two credit cards with balances, subtract your outstanding balance from your approved line of credit for each card. Consider the amount of available credit and the amount of credit used. The more you owe compared to the amount of your total available credit, the lower your score.
  3. Credit history factors 15% of your score. A longer credit history will increase your score. If you have a short credit history but have paid your debt on time, and have shown responsible behavior according to the information on your credit report, you could still have a high FICO score. That is why it is good to get started in life as early as possible with a small line of credit, pay on time, and pay more than the minimum balance. This will help establish credit and demonstrate a responsible payment history.
  4. New credit factors 10% of your FICO score. How much new credit am I taking on? When you shop, especially at the Holidays, merchants want you to open their credit cards so they make discount offers for your first purchase. Every new credit card you apply for will impact your credit report and add weight. Consider the amount of the one-time discount versus the weight on your credit report.
  5. Additional factors can influence your credit report by 10%. Having a mix of loans such as vehicle and mortgage loans and personal loans in addition to credit cards may help to increase your score.