credit score

Anatomy of your Credit Score

One of the most important numbers in your life may well be your credit score (FICO being the most common calculation algorythm). Not only do you need it for getting a loan or a credit card, your credit score is also looked at by prospective employers, landlords and your insurance company.

There are several factors that make up your credit score. Here are the general parts that make up your FICO credit score:

  • Payment history (35%)
  • Credit utilization (30%)
  • Length of credit history (15%)
  • Types of credit used (10%)
  • Recent searches for credit (10%)

Since your FICO credit score is so important, you need to know what actions can have a negative effect on your score.

  1. Paying late or not paying at all. Since thirty-five percent of your credit score is based on your payment history, your credit rating will suffer if you are often late paying bills. Ignoring your credit card bills is worse than paying late.
  2. Having an account charged off. This is what happens when creditors assume that you are not going to pay your credit card bill at all. This account status is one of the worst things that can happen to your credit score.
  3. Having an account sent to collections. Creditors may send your account to collections before they charge it off. This hurts your score almost as much as a charge-off.
  4. Defaulting on a loan. Loan defaults, like credit card charge-offs, show that you have not fulfilled your loan contract.
  5. Filing bankruptcy. Bankruptcy will hurt your credit for at least seven years. This should be used only as a last resort.
  6. Foreclosure. This will make it more difficult for you to get a mortgage in the future.
  7. Getting a judgment. In a judgment, the court was asked to get involved to make you pay your debt. If you pay the judgment, it will impact your score less than if you do not pay your judgment.
  8. High or maxed out credit card balances. The second most important part of your score is your level of debt. Having high credit card balances increases your credit utilization rate and decreases your score.
  9. Closing credit cards that still have balances. If you close a credit card on which you are still paying a balance, your credit limit drops to $0 while your balance remains, making look almost as if you have maxed out your credit card. If you are trying to stop using a credit card, put your card in your safety deposit box instead. Then don't use it until you have paid the balance down or off completely. This will have a better impact on your score.

Even if you think that your score is fine, you need to check up on it regularly to make sure that there has not been a reporting mistake that has negatively impacted your score. The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies — Equifax, Experian, and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months. Take advantage of this and do at least a yearly checkup on your credit report.