To many people their credit score is a mystery until they are denied credit or are offered credit with less favorable terms. Your best credit score is the result of a little effort on your part along with a few steps performed consistently over time.
Your credit score is determined by an algorithm that takes into account five different areas that will determine your credit worthiness and risk rating. To achieve your best credit score it is important to evaluate each of the five areas to see where you can improve your performance.
If you have significant negatives on your credit report it is best to follow a credit repair software system which individually addresses each entry on the credit report to remove anything that may be reported incorrectly. It will take some personal effort but the results are worth it.
The first area to evaluate is current credit standing. This is the most difficult to improve and the area that will drop credit scores the quickest. Credit standing looks at your payment history on all credit accounts and will place the most emphasis on the most recent events. It accounts for about 35% of your total score. Regular timely payments, no collections, no late pays or defaults will keep your credit score healthy. A single late payment on a credit card may drop your score 50 to 70 points. A second late pay in the same period of time will send scores tumbling by 100 points or more. Be sure to pay close attention to this area and you will be on track to your best credit score.
Credit utilization is the second most important area. It takes a snapshot of available credit and how much credit is outstanding. Ideally the credit outstanding should not exceed 30% of the available balance. If credit is regularly used up to the high credit limit it appears to creditors that there is insufficient cash flow and the client is relying on credit which indicates a greater risk. Regularly pay more than the minimum balance due and ideally pay balances in full each month.
The third area is credit depth and it will factor approximately 15% of the credit score. This portion is considered your credit character, it demonstrates how responsibly you have handled credit over the time since opening your first account. The longer you have had positive credit the higher your score will be in this area. If you have had negative events in the past then the more time that has passed since the negative, the less effect it will have on your credit scores.
Recent inquiries indicate that you have applied for credit. This is the forth area of consideration and will account for 10% of the total credit score. It is always prudent to space your credit applications apart and never apply for multiple accounts in a short period of time. Creditors will see this as a red flag as it makes an applicant appear desperate to expand their credit lines. This is often the result of someone experiencing a job loss or some financial set back where they may need to rely on credit.
The last area is credit dispersion and it will account for about 10%. Credit dispersion looks at the type of open credit accounts you have. If for instance you have five store cards and 4 bank cards but no other accounts then that is certainly not going to appear as a good balance of accounts. On the other hand if there is a car loan, a store card and two bank cards then credit is dispersed more evenly and is looked upon more favorably.
Following a debt management plan is a great way to improve your credit scores over time by improving the way you manage your debt. Understanding how each area of your credit reports affects you is a great first step towards achieving your best credit score.