At the start, let me just give the reader a small warning:
Each of the three credit reporting agencies in the U.S. (Experian, TransUnion, and Equifax) uses its own algorithm to determine consumers’ credit scores. For obvious reasons (i.e., the billions of dollars these firms earn each year), these methods are proprietary, carefully guarded secrets. There is no expert in the world who can claim to know precisely how any particular score is determined.
Even so, by reading between the lines based on information provided on the reporting bureaus’ own websites. It is safe to say that there are five core considerations if you are trying to improve your credit ratings. Understanding how your scores come about is the key to giving yourself a successful credit makeover. Here they are in (most likely) order of importance:
1. Payment history may be the most important part of the formula. Paying your bills in full and on time helps your scores, even if you have a bit of a checkered past with regard to paying on time.
2. Outstanding debts are a huge factor in determining creditworthiness. If the consumer owes a lot of money currently, there is less chance that they will be able to pay a new lender. Ironically, having zero debt is not necessarily good. Consumers ideally have a bit of credit that they pay on regularly, such as a credit card whose balance is paid in full each month.
3. Credit history is one factor that you can’t really change unless there are errors in your report — which there are in many credit reports. So check your reports on a regular basis. Finding and fixing errors can boost your scores.
4. New credit can deflate a good credit score. Be careful about applying for lots of new lines of credit within a relatively short period of time. Credit scores can drop by a hundred points or more if you go on one shopping spree and sign up for every store card to get the discount.
5. Credit in use is the amount of credit currently extended. This actually represents an easy way to bump your scores up. Check your reports, and you just might find forgotten open accounts that you no longer use. Close them.
Monitoring those five variables in your own life can really help to improve your ratings. Better scores lead to better deals on everything from automobile insurance to mortgages so stay on top of this!
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