Key components of your credit score

Individuals looking to purchase a new home, a car or apply for a new credit card needs to understand the importance their credit score has in determining whether they are granted a loan and at what interest rate.  Unfortunately, federal law does not mandate the three major credit reporting bureaus (Equifax, Transunion and Experian) to explain how one’s respective credit score is actually calculated.  

A recent article by Capt. Hank Coleman for military.com, however, explains the five characteristics that the respective credit bureaus use in determining your credit score.

First, and most importantly, the credit bureaus look at your debt payment history.  

•    Are you paying your bills on time each month?
•    Do you have past due accounts?  If so, how long have they been past due?
•    Do you have any accounts that are in collection?
•    Have you had any items repossessed?

Second, the amount of debt that you owe is examined.

•    Comparison between your credit limit versus the amount you have actually used (credit utilization ratio)
•    It is important to note that the smaller your credit utilization ratio, the better.  For example, if you have a credit card with a credit limit of $5,000, and you have charged $1,000, your credit utilization ratio would be 20%.  

Third, how long is your credit history?

•    The length of time you have a credit card is important.  If you opened a credit card account 10 years ago, for example, and have paid it off each month and have shown that you can be responsible, that builds a positive credit history.
•    However, if you opened a credit card 10 years ago, and have used it only once or twice a year, even though you paid it off on time each month, the lack of activity on the account is also taken into consideration.

Fourth, have you taken on any new debt recently?

•    Any time you apply for a new credit card, your credit score is impacted negatively because you are taking on additional debt without being able to show a responsible credit history on that account.
•    In addition, companies conducting credit inquiries also negatively impacts your credit score, if there are numerous requests.  Please note, however, that you are entitled to receive one free credit report on yourself each year without having it impact your credit score.  

Finally, the type of credit and debt you have is explored.

•    In this case, not all types of credit are considered equal.
•    The respective credit bureaus look to determine how much of your credit is in the form of major credit cards versus a retail store credit card versus a car loan versus a mortgage, etc.
•    If you are able to show that you can successfully juggle multiple types of accounts without any late payments or defaults, the result will be a high credit score.

As important as an excellent credit score is in being able to obtain a mortgage, for example under the more strict lending guidelines, it is also important for everyone out there to understand the items that can positively and negatively impact their credit score.  

Before applying for any type of loan, go to www.annualcreditreport.com to obtain a copy of your credit report and ensure that your credit is what you believe it to be.  If there are items that do not appear to be yours or  you thought were cleared up years ago and were not, work on getting those issues resolved before apply for a loan.  

It could save you a lot of time, aggravation and money over the long haul!