We still don’t know how credit is exactly calculated by the 3 bureaus (TransUnion, Experian and Equifax), because they will not release their algorithms. But they have given a percentage of how things are broken down:
– 35% Payment History: This includes how many times you’ve been late on accounts, when the last late was and how severe you’ve allowed accounts to go delinquent.
– 30% Amounts Owed: Total amounts owed on all accounts as well as the difference between your balances and limits (utilization). People who max out their limits have a greater risk for default. If your accounts are over 50% of your limit, this will negatively affect your credit, and under 50% will start positively affecting your credit. Keep your balances as low as possible.
– 15% Length of Credit History: The bureaus want to see a long history of credit. If you have to close accounts, choose to keep the old ones open so you don’t lose all that history.
– 10% New Credit: New credit isn’t always a bad thing. Although it does affect your length of credit, it’s another account on your credit that can help improve your scores. Do not apply for a lot of new accounts at one time or your scores will be hit hard.
– 10% Types of Credit: The bureaus want to see a healthy mix of accounts. Have a balance of revolving credit like credit cards and installment loans like auto loans and mortgages.
Please do not hesitate to let me know if you have any questions, comments or referrals.
Your Lender for Life,