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. 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: A credit reporting bureaus considers both the type of credit accounts that you have as well as their age. An account that is older and still active shows lenders that are considering loaning you money that you haven't negotiated or consolidated any old debts, but have been able to maintain them with a degree of financial responsibility. If you are planning to pay off any debts, pay off the newer accounts and keep the old ones open 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.
Be aware though, that if you negotiate a payment plan with a collection agency verbally, this is considered an agreement and the date can still be listed from the date of that conversation. This form of verbal contact can reset the time period again from today.
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.
Banks will frequently raise your credit limit because when you are in debt they are making money. While it doesn't hurt to accept an increase in your credit limit, you must act responsibly and use just what you can handled with your 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'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.
Here are 5 facts about credit scores that might surprise you:
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: A credit reporting bureaus considers both the type of credit accounts that you have as well as their age. An account that is older and still active shows lenders that are considering loaning you money that you haven't negotiated or consolidated any old debts, but have been able to maintain them with a degree of financial responsibility. If you are planning to pay off any debts, pay off the newer accounts and keep the old ones open 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.
Be aware though, that if you negotiate a payment plan with a collection agency verbally, this is considered an agreement and the date can still be listed from the date of that conversation. This form of verbal contact can reset the time period again from today.
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.
Banks will frequently raise your credit limit because when you are in debt they are making money. While it doesn't hurt to accept an increase in your credit limit, you must act responsibly and use just what you can handled with your 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'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.
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