John Clark

John Clark runs Raise My Score Credits Services in Concord. He can be reached at 704-425-2071 and at his website

You can’t watch television for more than an hour without seeing a commercial about your credit score.  This score not only determines whether or not you can get a mortgage loan, car loan, line of credit, or a credit card but also the amount of interest you must pay.

It also determines how much you pay for insurance and can be used by employers to make hiring decisions.    In spite of the fact that a credit score has a gigantic impact on your financial life most people know next to nothing about how it is calculated or what they can do to improve their score or maintain it.

First, I will give you a little background information.  The credit scoring system was developed by a company called Fair Isaac Corporation or FICO for short.  The scores range from 350 to 850.  FICO charges the credit reporting agencies a fee every time they use the formula.  The three largest reporting agencies are Equifax, Experian, and Trans Union.  The large majority of lenders use one or all of these credit bureaus.  For smaller loan amounts  the lender may look at a report from one of the three bureaus instead of all three, and for but for large loans the lender may examine reports from all three of them.

There are five components of a credit score. The first component is credit history which is 35 percent of your score.  The second is utilization which comprises 30 percent of your score.  The third age of credit is 15 percent of your score while the fourth is mix of credit and the fifth is inquiries.  Both comprise 10 percent each. 

Your credit history which is the largest component will be impacted by all your payments whether they are on time or late.  Other factors that affect your credit history are mortgage loans that have been foreclosed on, vehicles that have been repossessed, and accounts that have been turned over to a collection agency or charged off as well as any bankruptcy filings.  Your credit report will list all of these items good or bad that occurred within the last seven years.  The report will list any bankruptcies that have been discharged in the last ten years.

The next component is called utilization and accounts for 30 percent of your score.  Utilization measures how much of your limits on revolving accounts you are using.  Revolving accounts include credit cards and lines of credit where a borrower can draw on the account as long as the credit limit has not been exceeded.  This is how the bureaus measure your ability to manage credit.  The bureaus compare your balances to your limits and determine what percentage of your limits your balances equal.  The smaller the balance is as a percentage of your limits the higher your score will be.  Because of this the quickest way to raise your score is to pay down your credit cards.

Fifteen per cent of your score is the age of credit.  FICO uses two measurements to arrive at the age of your report.  The first measurement determines the length of time each account has been open then averages them to determine an average age.  The second measurement determines how long ago your first account was opened.  The higher these numbers the higher your score.

Mix of credit comprises 10% of your score.  Lenders like to see a person have several different types of credit.  They normally like to see two or three revolving accounts (credit cards and lines of credit), one or two installment accounts (examples are car loans, student loans, and furniture loans) as well as a mortgage loan.  This shows your ability to manage different types of credit.

Inquiries compose 10 percent of your score.  Each time you apply for credit the lender orders a report from one or more of the bureaus.  Every time a report is ordered it has a small impact on your score.  However, inquiries can only impact 10 percent of your score no matter how many inquiries you have.  Still you should only apply for credit when you absolutely need it.

With this information, you have a basic knowledge of how credit scores are calculated.  Having a good credit score is not only a matter of being responsible it also is necessary to have some understanding of how to work the system to your advantage.  Now, you are better able to do that.

John Clark runs Raise My Score Credits Services in Concord. He can be reached at 704-425-2071 and at his website

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