Painless Credit Repair

Have you ever wondered how your credit score is calculated? If so, you are just like many others. Actually, this is a very important thing for a person to understand since credit plays such a major role in a person’s life. Credit is used to obtain credit cards, bank loans, mortgages, auto loans, rent an apartment or house, apply for a job, turn on utilities, obtain cell phone service, obtain cable television service, obtain homeowners and auto insurance, and many, many other reasons.

The largest percentage of your credit score is derived from your payment history. Roughly 35% of your credit score is determined by how well you pay your bills on time. For example if the maximum credit score you could obtain was an 850, this would mean that you payment history would account for almost 300 points of your total credit score.

The second most important factor in credit scoring is your credit limit to credit balance ratios. If you have a credit card with a $1,000 maximum credit limit, the percentage that you owe compared to this limit will have a significant impact on your credit score. This factor in your credit scoring accounts for approximately 30% of your total credit score. Ideally, you want to keep your credit card or revolving credit balances between 20-40% of your credit limit. For example, if you have a credit card with a $1,000 maximum credit limit, you would want to keep this balance ideally at no higher than 200-400 dollars. Maxing your credit cards out is a very, very bad thing in terms of credit scoring and going over your limit is even way worse.

Coming in at 3rd is the length of your credit history, which accounts for about 15% of your total credit score. Having a long established credit history is going to hold a lot more “weight” than a short, newly established credit history. For this reason it is not good to close your credit card accounts after paying them off or transferring balances. Leaving credit card accounts open is much better and very important in terms of credit scoring.

Next, accounting for 10% of your total credit score is new credit and credit inquiries. Having a lot of inquiries against you on your credit report can have a seriously negative impact on your credit score. Thus, you should not constantly apply for credit. Do not apply for every credit card offer you see for the free gift, nor should you apply for credit that you do not need, just to see if you qualify. Try to keep your credit inquiries to a minimum. When shopping around for a mortgage or an auto loan however, keep in mind that you have approximately a 30 day window to shop around with whomever you want and have your credit pulled by multiple companies and as long as all credit inquiries are done within that 30 day window, they will only count as 1 inquiry against your credit score, which will have little if no negative impact.

Finally, the type and mixture of credit you have impacts roughly 10% of your credit score. If you have 2o credit card accounts, and no other credit, that is not a good mixture of credit usage. However, if you had say, 1 mortgage, 1 auto loan, and 2-3 credit cards, that is a very good mixture of credit and will help increase your credit scores.

Therefore, there are many different factors that help to determine your credit score. Understanding how all of these factors can improve your credit score can better help to improve your financial situation and better prepare you to obtain the best financing terms available on any borrowed money. Understanding credit can save you hundreds of thousands of dollars over the course of your lifetime and a conscious effort should be made to improve your understanding of how credit and credit scoring works. For more information on credit and credit scoring please see the following blog at the Your Credit, Your Life blog

The author of this article, Dave Zwierecki, is the President of First Security Financial Service and has over 10 years of experience in the credit, mortgage lending, and home improvement fields. He is the owner of http://www.GoFirstSecurity.com and http://www.TheMortgageU.com, which are both sites devoted to the education of consumers regarding real estate, mortgage, credit, and home improvement related material.