My Real Estate Blog

Here's a little information on how your credit score is calculated.  Hope it's useful!

1. Length of Credit History: The longer you've had credit the better. The agencies will be looking at the time that's passed since accounts were opened, the time since there's been any account activity, and then the time passed since accounts were opened based on what type of accounts.

2. Payment history: Do you make your payments on time? Have you missed payments or filed for bankruptcy? If you've defaulted on an obligation, your credit score will drop. On the other hand, if you pay faithfully each month, your credit score will go up.

3. Percent of Credit Used: Think of it this way. You have two cards with credit limits of $5,000 each. That means you are able to use a total of $10,000. If you have a $2,000 balance on one card and $3,000 on the other, you are using 50% of your available credit. The smaller percentage you are using the better. 50% is pretty high.

Many people think they should close an unused card. If you are paying monthly or yearly usage fees to the credit card company for an unused card -- then the answer is probably yes. But keep in mind, if you close one of those $5,000 credit limit cards, your new credit limit is just $5,000. If you now are using $3,000 of your $5,000 limit, you are using 60% of your available credit. This is bad news for your score.  

4. New Credit: Have you recently opened several new accounts? This is a red flag to lenders. They'll wonder if you're on a spending spree.

5. Types of credit: According to a lot of experts, it is good to have more than one type of credit open. This means some credit cards, a mortgage, and installment loans.

6. Settlements: Did you default on a loan? Have you filed for bankruptcy or foreclosure? Did you reach a settlement with a credit card company? These factors will lower your score dramatically, as they show you are a risky borrower.

7. Errors: From identity theft to clerical errors in reporting, mistakes on your report can cost you.  Check your credit score often to ensure accuracy.

Will a low score haunt you forever? Have no fear, your credit score changes over time. It'll rise if you're a responsible spender and make your payments on time. Your credit score truthfully reflects your credit history. So, the power to change it is in your hands.