Did You Know These 5 Facts About Credit Scores?
Most people understand the fact that their payment history has an impact on the credit scores, but there are a few additional factors that are used by the credit bureaus to calculate your score.
Here are 5 rather surprising facts about credit scores:
1. Income: Your level of income has no bearing whatsoever on your credit score. A person that earns less than the minimum wage could have a great score while a millionaire that earns six figures each year might have a poor credit score. The scoring system is used to determine whether or not a person is responsible with the money they have, not how much they earn.
2. Old Accounts: A credit reporting bureaus considers both the type of credit accounts that you have as well as their age. An account that is older and still active shows lenders that are considering loaning you money that you haven’t negotiated or consolidated any old debts, but have been able to maintain them with a degree of financial responsibility. If you are planning to pay off any debts, pay off the newer accounts and keep the old ones open if at all possible.
3. Don’t Pay Collection Agencies: When you pay of debts that are more than two years old you will not be helping your credit score. The score is calculated using the date of the last account activity. If the date is more than two years ago it starts to lose some of the negative impact.
Be aware though, that if you negotiate a payment plan with a collection agency verbally, this is considered an agreement and the date can still be listed from the date of that conversation. This form of verbal contact can reset the time period again from today.
4. Debt/Limit Ratio: The credit bureaus reward the people that are able to control their spending habits and are not required to max out their credit cards or exceed their credit limit. Keep all of the balances well below your credit limit if you want to increase your credit score. You will be able to improve your credit score by keeping your balances lower than 30% of your limit.
Always remember that banks make their profits by keeping you in debt. It does not hurt to increase your credit limits as long as you act responsibly and only use an amount you can handle based on your income.
5. Frequency of Credit Applications: It may be hard to believe, but 10% of your score stems from the number of credit applications you have submitted. Each time a creditor pulls your credit history an inquiry shows up on your report. The more inquiries that show up, the lower your credit score will be.
If you’ve applied for a lot of credit you might want to spend the next couple of months and pay the balances down before applying for anything else. The act of not applying for new accounts will begin to increase your score as the older inquires drop off.
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