Understanding Your Credit Score

Published on: Mon, Aug 3, 2009

Classified as: Credit Cards, Credit Repair, Credit Score, Free Credit Report

The first thing that is checked when you apply for a credit of any sort is your credit score. Although all of us may not know what a credit score means, but be sure that we all are rated by it and the credit score decides every offer we receive. Thus understanding your credit score is of utmost importance, and for future reference at least basic knowledge should be acquired.

How is a Credit Score Calculated?

Credit score is computed as an average of several elements from your credit report. This report is typically broken into five different sections and each of these sheets will represent a piece of the final score.

Total Payments Made

The highest percentage is taken by the category made up of credit and payment history. An issuer will look at all types of payments: credit card payments, retail accounts, installment loans and so on. He or she will particularly look at the number of delayed or not paid payments, time passed since the last skipped payment, number of problematic accounts as compared to accounts in good standing.

Total Amount Owed

The next thing taken into account when computing the score is the total amount owed. These amounts are looked at in their absolute value and also in proportion to the credit limit. The number of accounts with balances is also relevant.

Credit History

The third thing the issuers analyzes is the credit history, or how much credit you’ve had and for how long. Understanding your credit score is essential to you and you need to know that the length of all credit lines and their activity will be monitored and will matter significantly in the final credit score.

Recent Credit Activity

All scores take into consideration recent credit activity. This category includes number of credit inquiries, new opened accounts, their amount, the time since they were opened and of course reestablishment of credit history if there were any issues in the past.

Type of Credit Line

Although many people do not regard it as important but the type of credit line you have (credit card, installment, mortgage) also plays a role (about 10% of the final score) in computing your credit score.

Each of the above mentioned elements are specific to every one of us. It is impossible to give exact percentages as to how much an element weighs in the final credit score because the weight of the element may vary for everyone. If for some people amount owed is the major factor for others credit history may be essential.

Managing Your Credit Score

Just understanding your score will not do and managing your credit score is most important. You will be able to improve your credit score if you follow a few simple tips.

Try to pay all the bills in time. If it’s not possible to pay on time you can usually get away with paying the bill within a 30 day window of the due date. If you miss this date it is almost certain to end up on your credit report.
Keep balances low on your credit cards and try to pay off debt as soon as possible.
Avoid moving credit from one credit card to another. The low intro rates many companies offer for balance transfers can be very helpful, but it takes a toll on your credit score.
Avoid opening too many new accounts.
Hire a financial consultant immediately if you feel that you are unable to handle your finances yourself. Even a single visit can help you drastically improve your credit score, and if that results in a lower interest rate on a large loan it will more than pay for itself. A consultant will also be able to explain the credit score better.

Your credit report and your credit score will directly influence your credit payments and amounts. The higher the score the lower the interest rate and the payment will be. Thus maintaining a good credit report can benefit you in many ways. So its better to spend wisely, pay off the debt as quickly as possible and maintain a good credit history in order to get the best possible deals available.