Most people understand the fact that their payment history has an impact on the credit scores, but there are a few additional factors that are used by the credit bureaus to calculate your score.
Here are five surprising facts about credit scores:
1. Income: Your income level has no bearing on your credit score. A person earning below minimum wage could easily have a great score while a millionaire earning six-figures per year could have a really low credit score. The basis behind the scoring system is to determine how responsible a person is with the money they have, not how much money they make.
2. Old Accounts: When the credit reporting bureaus consider your credit score, they look at the types of credit you have and how old your accounts are. An older account that is still operating shows a lender the next time you apply for credit that you haven’t consolidated or negotiated your old debts, but have actively maintained them with a level of financial responsibility. If you intend to pay off some debts, pay off the newer ones first and leave the older ones open if you can.
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.
Keep in mind that if you speak to a collection agency and set up a payment plan this may be looked at as an agreement and the date may be listed as the date of the conversation. This type of contact can reset the time period on the date that you have the conversation.
4. Debt/Limit Ratio: The credit reporting bureaus reward those people who can show that their spending habits are controlled enough to not require them to max out their credit balance or overdraw their credit limit. Make sure that all your balances are way below your actual credit limit to increase your credit score. Keeping your card balance below 30% of your credit limit will definitely improve your score.
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 know you’ve already applied for a lot of credit, then spend a few months and pay down your balances before you apply for anything new. The simple act of not applying for new credit will increase your score as older applications fall away.
