Credit 101 Part 2

Welcome to Credit 101, Part 2. How is your credit score determined? Creditors look at various factors when calculating your credit score. The largest, most significant category is payment history, which accounts for 35% toward determining your score. Payment history is followed by amounts owed, which comprises 30%. Length of credit history, or how long you’ve had credit is 15%. New credit and types of credit are both allocated 10% on the scale to determine your credit score.



There are several things that individuals can do to improve their credit. We’ve consolidated this information into seven steps.

  • Step 1 – Pay your bills on time.
  • Step 2 – Check your credit report and remove any errors you may find.
  • Step 3 – Pay down your debt.
  • Step 4 – Pay off your debt instead of moving it around.
  • Step 5 – Avoid too many inquiries.
  • Step 6 – Have credit cards, but use them wisely.
  • Step 7 – If at all possible, try to keep earlier accounts established.

Pay your bills on time. Again, payment history is the single most important factor in determining your credit score. It makes up 35% of the total. Late payments, especially on your mortgage rent and automobile have a major impact on your credit history. A recent late payment has more negative weight than one that was made several years ago. Note that closing an account on which you previously had missed a payment does not make the late payment disappear from the report. Once a late payment has been fixed to your credit report, that late payment will remain there.

Check your credit report and remove any errors. Review your credit reports from all three of the credit agencies regularly. It’s a good practice to review them every three or four months so that you’ll be aware of any changes that may have occurred from the last time you reviewed it. Congress has enacted provisions that allow individuals to obtain a free credit report on an annual basis. In 2003 the United States Congress enacted provisions that allow consumers to obtain a free credit report from each of the three credit agencies. If you do not already have a copy of your credit report, you can access it online at does not charge you a fee for anything. Now, you can also contact the credit agencies directly and request your report at their individual websites.

Pay down your debt. For a good credit score, your account balances should be below 50% of the available credit. On an account with a $1,000 credit limit, your balance should not exceed $500. In order to get yourself into that position, you have to get out of the habit of paying just the minimum amount due. If you pay the minimum amount, due on a card, it will take you years to pay it off, depending on the balance and the interest rate.

Don’t move your debt around, pay it off. Moving debt around or constantly transferring balances over multiple cards will not improve your score. The most effective way to improve your credit score is to simply pay down the amount you owe. Just as we said in step three.

Avoid too many inquiries. Don’t apply for too much credit in a short period of time. Creditors become wary when they see a consumer’s credit report with a lot of inquiries on it, especially when they occur within a short span of time. When creditors see that, they may perceive it as a sign that an individual is actively seeking credit because they may be in some type of financial difficulty or they may be overextending themselves.

Have credit cards, but use them wisely. I know there are a lot of financial experts out there who say, use no credit cards at all. Just cut them all up, but having credit cards and installment loans, which you pay over time, will increase your score. This is especially true for someone who has a shorter or nonexistent credit history. The thing to keep in mind is that when you have those cards, you must use them wisely. Installment accounts such as mortgages and automobile loans have the most weight. Creditors like to look for experience when making the decision of whether to offer or extend new credit to you. An individual who has no credit cards tends to have a lower score than someone who has managed the credit cards they do have responsibly. So, it’s okay to use credit cards, just use them wisely. Pay the debt down, don’t overextend yourself and don’t charge to the maximum limit.

Keep earlier accounts if possible. In general, a longer credit history will increase your score. Approximately 15% of your total score depends on how long you have had the account. New Accounts, will lower your average account age, which will have a large effect on your score if you are lacking a lot of other credit information. If you have old accounts that are in good standing, don’t close them. Many times and young adults who are just starting obtain credit face the biggest barrier of not having any credit history at all. Consequently, they may be forced to get a co-signer or they may be offered a higher interest rate which mirrors and individual who has poor credit. If you already had established earlier accounts, try to keep those accounts open.


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