3 Things That Determines Your Credit Score

 

A creditor may look at the average daily balance on each card as one of the three pieces of the puzzle that determines your credit score. Knowing your credit utilization gives you the information to use the other two pieces of the puzzle in getting the best possible credit score.

This is the first piece of the puzzle. Knowing your credit utilization is important if you want to get the best possible credit score. Having a high utilization puts you in a high-risk category, which is not attractive to most creditors. Credit utilization is calculated by dividing the account balance by the credit limit, which is the maximum amount of credit you have from the creditor. For instance, let’s say your total available credit is $10,000 on each card and your balance is $8,000 on one card and $4,000 on another card. To calculate, take the balance of $8,000 by the $10,000 credit limit for each card, then divide it by whichever card has a higher interest rate. The resulting number is your credit utilization, which would be one-third or 30%. Using the same math, we calculate the same balance of $4,000 by the $8,000 credit limit for the first card and $4,000 by the $10,000 credit limit for the second card. Since the balance for the second card is lower than the balance on the first, it would be 30% in our example. The third card would have a utilization of only 20% in this case.

The second piece of the puzzle is your credit history. If you tend to be making late payments to creditors, or if you never seem to have any revolving credit, then you’re likely to have a low credit score. Paying your bills on time is great, but you should also try to have as much credit open as possible. The more credit you have, the better. Having a large amount of credit might leave you with a lower score. 10, 20, or 30 percent of the credit available to you is usually sufficient to have a higher credit score.

Review your credit reports from all three of the major credit reporting agencies at least twice a year. Your credit reports do not always contain credits payments. However, if there are any disputes or errors in the credit reports, the consumer must conduct thorough and ongoing work to correct the errors and raise the credit score. Dispute resolution is an ongoing process.

The third piece of the puzzle is your credit ratio. This is calculated by dividing the balance of your outstanding credit accounts by your credit limit on those accounts. For example, if you have a $10,000 limit on your outstanding credit, and your balance is $5,000, then your ratio is 50%. Although you might not want that level, unrealistically high debt will lower your credit score. Prep avail of the services from your local credit repair or debt management company.

Understanding the credit score can be challenging if you don't understand how the numbers are derived. Use the free online resources, such as news articles, company and consumer websites, and help from your local credit repair or debt management counselors.