What's Hurting Your Credit Score?

Many believe that if they only pay their credit cards bills on its due date their credit score will improve or never decrease. While this is true, to some degree, it is not completely correct. The reason this is not totally accurate is that your credit score is not solely base upon on time payments-or in credit terms, Payment History. Your credit score is base on five different categories: New Credit, Types of Credit, Length of Credit History, Oustanding Balances, and Payment History.

New Credit 10%: Multiple requests for credit (also known as Inquiries) can reduce your score. Multiple inquiries are noted as you either trying to get a high amount of credit (possibly because of lack of money) or you being rejected by lenders and having to apply elsewhere. As a result of their speculation, creditors will view you as a greater risk. So limit the amount of credit cards you apply for. A rule of thumb, have only one credit card that you can pay off at the end of each month.

Types of credit 10%: Your score will consider your mix of credit cards, retail accounts, installment loans, mortgage loans, etc. Also, your score takes into account what kind and how many credits accounts you have. The more bad debt you have (credit cards, store accounts, unsecured loans) the lower your score. However, good debt (mortgages, car loans, student loans) can help your credit score.

Length of credit history 15%: Your score takes into account the length of time your accounts have been established. Also, how long it has been since you used certain accounts. This is important to lenders because they want to know your experience in dealing with credit. A novice college student, in many cases, will not handle debt and credit the same way as an established working adult.

Outstanding balances 30%: Your total balance on all of your accounts (credit cards, store accounts, installment loans, etc) and the total amount of credit that is available to you is the most significant factor in determining your FICO score. This is called your debt to credit limit ratio. Owing over seventy-percent on your credit card accounts or "maxing out" on various credit cards can increase your ratio, which is not a good thing, and in turn will decrease your credit score. Maxing out your credit cards or having a high balance implies that you are overextended financially, and are more likely to make late payments or not make payments at all.

Payment history 35%: Of course we all know that bankruptcies, collection accounts and tax liens can hurt your credit. But did you know that late payments have an equal or in many cases a greater negative impact on your score than the bankruptcies, collection accounts, and other major credit mishaps? How recent and how frequent the payments are late counts as well. The most recent negative activity has the greatest impact on your score. Forexample, a 30-day late payment made just a month ago will have a greater impact on your score than a 90-day late payment made two years ago or a bankruptcy file nine years ago.

Here is a chart demonstrating the breakdown of the five credit categories.

Paying your bills on time is not the all encompassing determining factor that affects your credit. By no means am I suggesting being late on your payments! What I am suggesting is to watch your debt load. Too many credit cards and store accounts can hurt your credit, even if you make the monthly payments on time. If you have max out or is close to the limits on your credit cards, this can surely hurt your score even if you make your payments on time. So be wise when it come to your credit. Do not overextend yourself financially; your credit score will increase significantly if you follow this wise truth.

What's Hurting Your Credit Score?

By: Twanfran Jackson

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