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Understanding Credit Scores

Once you get your credit report, you'll notice that the information contained in it is organized in sections: your personal information, credit summary, account information, inquiries, collections and public records, along with summaries of your rights under state law and the Fair Credit Reporting Act, plus instructions on how to dispute information found in your report.


Scores improve gradually
It's important to be patient with the process when it comes to increasing credit scores. Once you've fixed all errors, are paying your bills on time, reducing balances by paying more than the minimum payments and lowering interest rates as much as possible, be patient and let time work to your benefit. It may feel like you're watching grass grow, but if you're consistent with following these healthy habits, your credit scores will definitely increase and you'll be well on your way to getting your credit on track.


1. Payment history on account (35 percent)

Paying your bills on time is the most important thing you can do for your FICO score. Mind the due date, and make sure your payments have made it to the lender by then. Allow for seven to 10 business days for your payments to arrive, or if you're paying online, adequate processing time.

2. Amounts owed (30 percent)

The second biggest factor, amounts owed, translates to how close to the credit limits you are on your cards. If you're trying to max out your score, you want to charge less than 10 percent of the card's limit, adding that he's frustrated that 50 percent is sometimes advised because nothing "magical" happens with your credit score if you're charging 50 percent of your credit limit. You must realize that a higher percentage won't win you as many points.

3. Length of your credit history (15 percent)

The third factor is the length of your credit history. Only time can help you there, but one mistake people can avoid here involves closing old credit cards. Closing an old credit card shortens the length of your credit history and lowers the total credit you have available from all your accounts. With a lower total credit limit, you end up looking more maxed out than you really are. You actually benefit from the unused card, he says, because it helps your utilization ratio -- how much you owe compared to your available credit.

Suppose you have an old, unused retail card that has a high interest rate. First of all interest rates are not factored into the FICO score. To keep the card open, periodically purchase small items and pay off the balance. The benefit of keeping unused cards comes when you do need to charge a large balance. Because your credit limits are so high, the large balance will affect your credit score less. There is a component for having too many credit cards, but it's worth fewer points than charging too much on fewer cards.


4. New credit (10 percent)

The fourth category, new credit, refers to applications you've put in recently for new credit. It includes recent inquiries, how many recently opened accounts you have, how old each account is and how old each inquiry is. Every time you apply for in-store credit, for example, you're giving permission to pull your credit report and that counts against your score. Not every inquiry will count against your score, however. According to, the FICO scoring model ignores mortgage and auto inquiries generated in the 30 days before scoring and counts older mortgage and auto inquiries made within a short period of time –- a 14- or 45-day window, depending on the version of the FICO scoring model -- as one inquiry.

5. Types of credit in use (10 percent)

The fifth category looks at the different types of credit you have. You'll likely have a better score with a mix of revolving credit, and installment credit, such as mortgages and car loans. That said, don't take on more debt than you can handle simply to improve your score. Paying your bills on time earns you more points than having a pleasant potpourri of credit accounts.