Understanding Credit Scores

It may be surprising to know that as recently as year 2001 as many as 70 percent of the American population didn't even know they had a credit score. This is because creditors did not want to disclose this information to consumers as they felt consumers would be able to inflate their scores, making the scores less accurate. However with pressure from the congress and some consumer groups we now are able to keep tabs on our credit scores.

We hear about credit scores every day, but since these scores are still fairly new to consumers many people do not know what they actually mean. Here is a short guide to how a credit score is comprised, what a good credit score is considered to be, and how you can boost your credit:

What is a credit score comprised of?
A credit score can be broken down into five different categories: payment history, amount owed length of credit history, new credit, and types of credit in use.

Payment history makes up 35 percent of the total credit score. Creditors are looking for consumers that have a long history with no missed payments. This shows a steady payment history which makes the consumer less of a risk. It also shows customer loyalty. There are many credit cards that offer no interest for a set period of time which appeals to consumers to constantly apply for new credit. However if you apply for new credit and then cancel the credit card after the introductory period it will adversely affect your credit history.

Another large part of a credit score is the amount owed. Thirty percent of your score will be base on this category. This is calculated by the amount owed versus the amount of credit available. If the consumer is close to the maximum amount of credit they may be deemed as a high risk for future late payments and therefore their credit score will be adversely affected.

The length of credit history will account for fifteen percent of the total credit score. Basically a consumer who shows a long history with most credit accounts will benefit in their credit score. This is calculated by the consumer's oldest account and then averaged with the life all other accounts. This is why it is important to keep some credit accounts, even if you are no longer using them.

Ten percent of the credit score is attributed to the types of credit in use. Types of credit can include loans such as mortgage or car loan, credit cards, and retail accounts. A credit report with a good mix will fare better than those with mostly credit cards.

The final ten percent of the credit report is based on new credit. If a consumer opens several accounts in a short period the credit score may be adversely affected. Multiple inquiries will also adversely affect your credit rating. There are some exceptions to this, for example if you, a potential employer, or an unsolicited credit agency (such as a company offering a pre-approved credit card) were to check your credit it would not be affected. Also there is a 14 day grace period if you are shopping for credit, anyone who inquires during that 14 days will be counted as 1 inquiry.

What Is a Good Credit Score and How Can You Boost Your Credit?
Typically a good credit score is 720 or above. Anyone who is above 720 should not have to worry about boosting their scores as they will be lumped with those who have scores of over 800. If your credit score is below 700 you should strive to boost it.

Boosting your score may not happen overnight, however since most of your credit score is based on recent activity you can boost your score fairly quickly. Simply paying all payments on time will show good behavior and will boost your score.
Probably the best way to improve your score is by paying down your credit. People with lower balances are rewarded. In fact it is recommended that you only use about fifty percent of the allotted credit given. You can also boost your score by rotating your cards. Cards that are dormant will not help your credit score. Finally you should avoid opening new accounts, especially several in a short period of time. These few simple things will provide a noticeable boost in your credit score in as little as six months.