Credit scores are calculated on the basis of information recorded in an individual’s credit report. Your credit store is determined by five distinct categories; each having a different weight in determining your final score. Learning about these categories of information will guide you to take the appropriate steps toward credit score improvement.
Payment History
Your payment history has highest weight of 35% in calculating your final credit score. In general, this category depicts the manner in which you handled your credit payment history. This can include payment of debt in categories like credit cards, installment loans, mortgages, retail accounts, and so on. By paying the bills within the time limit, you can keep your payment history good enough to contribute towards an impressive credit score.
Bankruptcy, amount owed on past due accounts, level of delinquency, and various other factors can affect the contribution of this category towards your credit score.
Amounts Owed
The amounts you owe on various credit accounts and also the number of accounts with a balance can contribute as much as 30% in the calculation of your credit score. An important factor is the ratio of credit used to the amount of credit available in the account. It is favorable to maintain a good credit limit in your accounts. In the case of installment loans, the proportion of balance to the original amount borrowed can also affect your final credit score.
Length of Credit History
The amount of time that your credit account has been open has a 15% weight in determining your final credit score. An additional factor affecting your credit score is the length of time since you had activity in other credit accounts. Thus, it is recommended to keep your old accounts active, as it will have positive contribution towards your credit score.
New Credit
The number and types of new credit accounts, along with the number of inquiries made in these accounts add up to about 10% of your credit score. The time period between opening a new account and the duration of time between credit inquiries can impact your final credit score as well.Â
Types of Credit Used
The different types of finances you borrow can contribute a weight of 10% in calculating your final credit score. For instance, installment loans can have a different impact on your credit report as compared to the mortgage.
As you can see, payment history, amounts owed, length of credit history, new credit, and types of credit used can affect credit sore in varying levels. Knowledge of these categories in advance can help you maintain good credit.