Did You Know These 5 Facts About Credit Scores?
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 five surprising facts about credit scores:
1. Income: Your level of income has no bearing whatsoever on your credit score. A person that earns less than the minimum wage could have a great score while a millionaire that earns six figures each year might have a poor credit score. The scoring system is used to determine whether or not a person is responsible with the money they have, not how much they earn.
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 the Collection Agencies: If you pay off collection agencies or any debts that are more than two years old your credit score will not be improved. The credit score is calculated using the last date of activity, so if that date is more than two years ago it starts to lose it negative power.
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 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: It may be hard to believe, but 10% of your score stems from the number of credit applications you have submitted. Each time a creditor pulls your credit history an inquiry shows up on your report. The more inquiries that show up, the lower your credit score will be.
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.