Now that you understand the sections of the credit report, how can you comprehend your numerical rating? Credit scores range from 300 to 800. A score over 720 will help you get the most desirable rates for loans or credit cards.
Your credit score is based on a number of factors, weighted in the following proportions:35% bill payment history: This portion of your score addresses whether you’ve paid your bills, as well as whether they’ve been paid on time. Failing to pay your bills or frequently paying them late will have a significant negative impact on your score.
30% outstanding debt and available credit: The amount you still owe has a large effect on your credit score, and rightfully so. The more you owe, the more your score will be decreased; however, having a very large amount of credit available to you (called a favorable debit to credit ratio) can help improve your score even if you owe a lot.15% length of credit history: The longer you’ve been making payments in full and on time, the better your credit rating can be. If you’ve just gotten your first credit card and have handled it well, your score may not be as high as that of someone who has been using credit for several years. If you accumulated a large amount of debt some time ago but have since paid it off and have been showing financially sound behaviors for several years, your score will not necessarily reflect your past indiscretions. Likewise, if you formerly managed your credit well but have been having problems recently, your credit score will reflect the length of time since your successful use of credit with a lower score (even if you keep well-handled accounts open, the length of time since the credit was last used is taken into consideration).
10% mix of credit: The more types of credit you’ve been able to use successfully, the better. Don’t use this as an excuse to take out a car loan or buy a new house, however—if you aren’t on top of your existing debts, adding more definitely won’t improve your score. A good blend of well-paid credit cards and different types of loans can boost your total in this category.
10% new credit applications: This section deals with applications for loans or credit that you have recently completed. Credit scoring agencies understand the need to shop around and compare loan rates from different companies, so having outstanding applications of this nature shouldn’t hurt your score. However, if you’re already in some financial trouble and are applying for lots of credit cards (possibly with the intent of paying off old debts with new cards), this may raise a few eyebrows over at FICO.
As you can see, your credit score does not take into account employment, so you should be able to get a fine score even between jobs (unless of course this is affecting your ability to pay bills, or causing you to incur lots of debt on credit cards). Credit scores are, however, based entirely on your credit report, which may have errors. This is why you’re entitled to a copy of your credit report each year, so you can check it for inaccuracies, and request that those problems be addressed.
The really bad thing about bad credit is that it can sometimes contribute to a cycle: a bad credit score prevents you from getting good rates on loans, making your payments higher, which will likely make it more difficult for you to make payments on time and improve your credit. If your credit score is suffering, refrain if at all possible from opening new accounts and possibly lowering your score even more. Pay off as much debt as you can without resorting to additional lines of credit, and you’ll be more likely to receive better rates on future loans.
Once you understand your credit score, you have no excuse for not working to improve it—so make the payments, and open (or close) the accounts necessary to boost your credit score by your desired amount.
