According to Visa, more than 60 percent of people don’t understand what determines a credit score.
Here are the top five factors people think matter—but don’t and the five that really do.
What Doesn’t Matter
1. Employment history
2. Interest rates on debt
5. Where you live
What Does Matter
1. Paying on time: This is 35 percent of your credit score
Are you paying on time?
Were you late just once?
Were you sent to collections?
Credit card companies allow you to have a minimum payment for your convenience. You must pay at least the minimum amount listed on your bill to avoid a negative effect on your credit score.
2. Amounts you owe – your Debt-to-Credit Limit Ratio: This is 30 percent of your credit score
This is the percentage of money you have already borrowed compared with the amount you are allowed to borrow, i.e. your credit limit.
3. Your credit history: This is 15 percent of your score
This began the day you opened your first credit card.
The longer your history, the better.
If you have to cancel a card, do not cancel your oldest card if you can avoid it. It will erase a large chunk of your credit history and negatively affect your credit score
4. New accounts and credit checks: This is 10 percent of your credit score
Constantly searching for or opening new credit will make banks less likely to invest in you because you are seen as a risk.
However, if you are shopping around for the best interest rates on loans, as long as the account inquiries are within a two-week span, your credit score will not be affected if the inquiries were for the same kind of credit. For example, you made three inquiries for a car loan within two weeks. You have a right to shop around for the best options.
5. The number and types of accounts: This is 10 percent of your score
A mix of credit cards, mortgages, car loans, etc. shows you handle your financial responsibilities well – if you have a good payment history.
Do not apply for loans and credit cards just to have a good mix of credit. New account inquiries deduct points from your score.
Reader’s Digest, February 2012
What Determines Your Credit Score? | eHow.com