Most consumers are aware that their payment history has a direct effect on their credit rating, but there are a number of other factors that credit bureaus use to calculate your credit score.
Here are 5 facts about credit scores that might surprise you:
1. A persons income level has nothing to do with their credit score. You could easily see a millionaire that earns six figures a year with a very low credit score. You could just as easily see a person that earns minimum wage with a strong credit score. The scoring system is used to measure how responsible a person is with the money they have, not how much they earn.
2. Age of Accounts: When the credit bureaus calculate your score, they study the type of accounts you have and the age of your accounts. An account with some age shows potential lenders that you have never negotiated or consolidated your old debts. Instead you have been able to maintain them a high level of responsibility. If you need to pay off some of your debts, pay the newer ones and leave the older ones alone if at all possible.
3. Don’t Pay Collection Agencies: When you pay of debts that are more than two years old you will not be helping your credit score. The score is calculated using the date of the last account activity. If the date is more than two years ago it starts to lose some of the negative impact.
You should be aware though that if you negotiate some sort of payment plan with a collection agency, this will be considered an agreement and the date of activity can be shown as the date of the conversation.
4. Debt/Limit Ratio: The people that can show the reporting bureaus that they have their spending habits well controlled will be rewarded. When a person is able to keep their balances well below their allowed limit, the score will be increased. It is best to keep all card balances below 30% of the credit limit.
Remember that when you are in debt, the banks are profiting. It won’t hurt to increase your credit limit it you are able to act responsibly and only use the amount that you can comfortably handle with your current income.
5. Frequency of Credit Applications: Did you know a full 10% of your total credit score comes from the number of times you’ve applied for credit? Every time someone pulls your credit, the enquiry is listed on your credit report. The more enquiries shown on your report, the lower your score will go.
If you’ve applied for a lot of credit you might want to spend the next couple of months and pay the balances down before applying for anything else. The act of not applying for new accounts will begin to increase your score as the older inquires drop off.