Improving Credit Scores - Part II

Here is part II of the improving credit scores article which I posted the other day. As mentioned previously, there are approximately 5 major categories used for determining credit scores. The first two categories were credit history and credit utilization. Now it is time to learn about the 3 smaller categories used in calculating credit scores.

First, we have the length of a person's credit history, which accounts for approximately 15% of a credit score. This means that it is smarter for a person to establish a long history of open credit accounts than to open and close accounts frequently. For example if you had 2 credit cards with a 10 year credit history, it would make a lot of sense to keep these accounts open, even if they are rarely used to continue to grow the history and age of these accounts. If you were to close all of your credit card accounts and open up new accounts this could potentially have a very negative impact on your credit scores.

The next contributing factor is the type of credit used, and this accounts for about 10% of your score. It is much better to have a variety of different accounts than to only have one type of account. Some of the different types of credit are credit card accounts, mortgage accounts, auto loans or installment loans, retail accounts, etc... Thus, a good combination of these accounts would be preferred to maximize your credit rating.

Finally, the last contributing factor to determining a credit score is new credit. This category includes number of new accounts opened, the time and type of accounts opened, recent credit inquiries and how long ago the inquiries were, and a re-establishment of a good payment history after payment problems. Under this category one would not want to have tons of credit inquiries, a lot of new accounts, or a lot of new accounts opened in a short period of time.

Any one of these 3 areas mentioned above can play a great deal into the overall calculation of a credit score. Therefore, it is very important to make sure it is understood how a credit score is calculated in order to have the best opportunity for the best and lowest financing rates available. Hopefully, this will give people a better understanding of the credit scoring system and how these scores are indeed calculated.