Understanding the Components of Your Credit Score


Guest Post Courtesy of Veracity Credit Consultants

What do consumers know about their credit scores?  We have all heard a thing or two about credit, but do the good habits of our day to day financial decisions benefit our credit score?  The bottom line is the Credit Scoring world is complex and secretive place.  Little of what the average consumer understands or thinks they know about credit is in fact important or relative to benefiting their credit score.

Today, credit scores can be a consumer’s biggest asset to build or protect.  Understanding the Credit Scoring Models and being on top of the game could save individuals thousands a year and make them a very powerful consumers.  A consumer’s credit profile is considered for insurance, mortgages, employment, auto loans, utilities, cell phones and the list goes on and on.  Creditors seek current or past account histories to determine personal risk.  Here is a basic overview of the 5 components of our credit score:

1.    Payment History (35% of credit score / 297.5 points) – This is where positive & perhaps negative payment history is reviewed.  To optimize this component of the credit score one must have open accounts and make on time payments to their creditors.  The longer that positive payment history is reviewed the more points will be accumulated in this section.  Negative payment history (public records, collections, charge offs, late payments) are also assessed in this section.  The more derogatory marks that report to the credit bureaus the bigger negative impact on the credit score.  This is essentially where most of any type of “credit repair” can help the scores.
2.    Debt Ratios (30% of credit score is Revolving Debt / 255 points) – The majority of debt that impacts your credit score are credit cards and HELOCS.  By utilizing over 30% of a line of credit’s balance to limit ratio one will lose points for that specific account. Hence, a maxed out credit card will certainly hurt a credit score.  There are several ideas how to maximize these ratios and spread debt around to help scores without available cash – consult with a Veracity representative to review your specific profile.  Additionally, do not pay collections without consulting with a Veracity representative.  In cases, if a collection is paid credit scores can actually go down.  If paying or settling on a collection is the best option, there are strategic ways and documentation needed when doing so.
3.    Length of Credit History (15% of credit score / 127.5 points) – A consumer’s credit history is an average of only open accounts.  In most cases do not close older accounts or open new accounts if not absolutely necessary.
4.    New Credit (10% of credit score / 85 points) – This section relates to the amount of times a consumer has their credit pulled (credit inquires) to apply to open a specific account.  Understand that every time a creditor pulls your credit it will negatively impact your scores – no matter what you have heard.  However, by pulling a credit report from an internet source a consumer will not hurt their scores.
5.    Types of Credit (10% of credit score / 85 points) – A consumer can only have revolving, installment, or real estate types of accounts.  A good mix of these types of credit is recommended to achieve high credit scores.

Veracity Credit Consultants



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