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Debt To Credit Ratio Credit Score

December 19th, 2010 |

Author: Gavin

Tips on Maintaining Good Credit: How Credit Scores are Figured

Your credit score comes into play in just about every financial transaction you make. Whether you’re buying a home, a car or applying for a loan your credit score is largely how a lender will determine if you are an acceptable risk. It’s really not hyperbole to say that maintaining a good credit score is essential to your well being.

Credit scores are given as a three digit number and the higher your score, the more creditworthy you’ll be seen as by prospective creditors. Your credit score is based on your financial history over the last decade and there are many different factors which go into to determining this number.

The Fair Isaac Company (FICO) keeps the exact formula used to come up with consumer credit scores a closely guarded trade secret. Generally speaking, the following factors are those which are the most important in determining your credit score:

Payment History: This makes up around 35% of your score and is exactly what it sounds like; this is your record of making payments on time (or not, as the case may be). Late payments will negatively affect your score and of course, any payments which you have neglected to make and have been referred to a collection agency will have a serious impact on your credit score. Collections are one of the biggest black marks you could have on your credit report, so be sure to make your payments in full and on time; your credit score will be better for it.

Debt: How much debt you are carrying at present makes up about 30% of your credit score. More accurately, what is important here is what is known as your debt to credit ratio. This is a measure of how much debt you have compared against the total amount of your credit limits. It’s best for your credit score to have no more than 25% of your total available credit tied up in the form of debt.

Time: This is the amount of time that you’ve had any credit accounts. The longer you’ve kept an open credit account, the better. This comprises about 15% of your credit score; if you’ve ever been advised to keep old, unused accounts open, this is the reason (as well as that this improves your credit to debt ratio).

Credit Mix: About 10% of your credit score is based on what kinds of credit accounts you have. Different mixes of accounts will be better for different consumers, but typically it’s best to have installment accounts (like car loans or student loans), revolving accounts (such as credit cards) and having a mortgage is also a plus. Naturally, all of these accounts should be kept in good standing. Being able to manage different credit accounts makes you a good risk in the eyes of lenders.

Inquiries: How often your credit report is checked by prospective creditors also affects your score. Any time that you apply for loans, credit cards or any other type of credit, this is noted on your credit report. Having too many inquiries show up on your credit report may give lenders the impression that you are having financial problems and as such you may appear to be an unacceptable risk. This factor makes up about 10% of your credit score.

As you can see, many items are factored in to figure your credit score. It’s important to stay on top of all these things and maintain a good rating as it can have long term effects on your financial health.

About the Author

Discover additional ways to manage and fix your credit at http://www.debt-to-income.com/credit-score-explanation.html Money saving expert Richard Gorham guides you on the path to financial freedom. Find free tools and advice on managing debt and creating additional income at http://www.debt-to-income.com