How You Can Kill Your Credit Score

Your Credit Score Affects Your Life

In the perfect world, we only borrow to pay for goods and services that we know we can afford.  However, there are times when the opportunity to purchase is just too good and it makes sense to borrow to finance the purchase.  After all, the ability to borrow in these situations is the reward for establishing a good credit score.

It’s no secret that credit markets have tightened since the beginning of the recession.  Credit is no longer easy to obtain and the value of maintaining a solid credit score has never been more important.  Credit card companies were hurt badly by the global recession so it is only natural that these lenders are taking long, hard looks at new applicants.

Because credit is a way of life, virtually affecting every transaction from brief payday loans to long-term commitments, like purchasing a home, maintaining a good credit score affects your life and every financial decision you make.  That is why it is so surprising that consumers do not fully understand the components of a good credit score. Every consumer should be an informed borrower.

A Credit - What is Credit? - Credit by on credit

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“Credit score, beware!  She will kill you”.  Creepy Little Bird by MikeOliveri, on Flickr. This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Generic License.

Factors that Have No Bearing on Your Credit Score

There are many misconceptions about what factors actually determine an individual’s credit score.  Below is a list of factors that many persons believe affect their credit score, but that have no bearing on your score.

  • Marital status
  •  Age
  • Receipt of public assistance
  • Salary
  • Occupation
  • Employment history
  • Rental agreements
  • Participation in a credit counseling program

These factors may affect the way you live but they do not affect your credit score.  That does not mean that lenders do not want to know this information.  Most often they do.

Factors that Affect Your Credit Score

It is surprising how many consumers who do not understand the factors that are the basis of a personal credit score.  In order to protect our credit properly, you should be aware of these five factors. By acknowledging these 5 keys factors and their weight, you can take measures to protect your good credit.

Payment History (35%) – Your record of timely payments provides an analytical look at how you manage your obligations.  Lenders do not want to incur collection services do a high value is put on your track record.

Total Amount of Indebtedness (30%) – Credit rating agencies evaluate the amount of credit exposure you have and place an emphasis on your total open liabilities.  In most cases, consumers with histories of significant amounts of open credit are rated lower than consumers who have small amounts of outstanding debt.  It is more favorable to have two or three open credit lines with small balances than one large amount of exposure.

Length of Credit History (15%) – Persons who have had a presence and history in the credit industry establish patterns.  These experiences can vary between good historical data and not-so-good data.  The history is important because it reflects trends and money management skills.

New Credit (10%) – Credit agencies look cautiously at borrowers who open new credit accounts in a short period of time.  This is tricky because the conscientious borrower may find better rates and may apply for the more favorable options.  The credit bureau is usually unaware of why the borrower is filing multiple applications and reports the conscientious borrower’s activity just as they would for a person who is seeking more credit in order to consolidate debt.  In terms of your credit score, the less new accounts you seek the better your score will be.

Types Of Credit (10%) – Most likely your credit score consists of a number of different types of credit you use. These can be:

  • Installment Loans
  • Finance Company Loans
  • Payday Loans
  • Retail Charge Cards
  • Credit Cards
  • Mortgages
  • Others

Credit companies prefer to see a mix of types of credit.  That mix provides information about your money management skills.  However, it is not a good idea to apply for credit that you will not use.  The existence of open accounts is considered exposure and the less exposure you have, the better the credit score will be.

Credit is a good thing. If you take care of it, it will take care of you.

Tom
 

Arnel Ariate is the webmaster of Money Soldiers.

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