Lot Factor
As mentioned in previous articles, there are 5 major categories used for determining credit scores. The first two categories are credit history and credit utilization. These two categories have already been discussed in the article Credit Scores - Two Main Contributing Factors to Credit Score Calculations. Now it is time to learn about the 3 smaller categories used in calculating credit ratings.
First, the length of a person's credit history, which accounts for approximately 15% of a credit score, helps to determine credit ratings. This means that it is smarter for a person to establish a long history of open credit accounts than to open and close accounts frequently. For example if someone had 2 credit cards with a 10 year credit history, it would make a lot of sense to keep these accounts open, even if they are rarely used, in order to continue to grow the history and age of these accounts. If a person were to close all of your credit card accounts and open up new accounts this could potentially have a very negative impact on that person's credit scores.
The next contributing factor is the type of credit used, and this accounts for about 10% of the score. It is much better to have a variety of different accounts than to only have one type of account. Some of the different types of credit are credit card accounts, mortgage accounts, auto loans or installment loans, retail accounts, etc... Thus, a good combination of these accounts would be preferred to maximize credit rating. Placing all of a person's eggs in one basket is never a good thing.
Finally, the last contributing factor to determining a score is new credit (this also accounts for roughly 10% of the score). This category includes number of new accounts opened, the time and type of accounts opened, recent credit inquiries and how long ago the inquiries were, and a re-establishment of a good payment history after payment problems. Under this category a person would not want to have tons of credit inquiries, a lot of new accounts, or a lot of new accounts opened in a short period of time.
Any one of these 3 areas mentioned above can play a great deal into the overall calculation of a credit score. Therefore, it is very important to make sure it is understood how a credit score is calculated in order to have the best opportunity for the best and lowest financing rates available. Hopefully, this will give people a better understanding of the credit scoring system and how these scores are indeed calculated.
The author of this article, Dave Zwierecki, is the President of First Security Financial Service and has over 10 years of experience in the credit, mortgage lending, and home improvement fields. He is the owner of http://www.GoFirstSecurity.com which is a site devoted to the education of consumers regarding real estate, mortgage, credit, and home improvement related material. For more help on improving, repairing, correcting, or increasing your credit score please visit http://www.creditrepairxyz.com/.
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