Credit Tips

5 Factors of Credit

Credit scores are comprised of five factors. Points are awarded for each component, and a high score is most favorable. The factors are listed below in order of importance.

  1. Payment History-35% Impact
    Paying debt on time and in full has the greatest positive impact on your credit score. Late payments, judgments and charge-offs all have a negative impact. Delinquencies that have occurred in the last two years carry more weight than older items.
  2. Outstanding Credit Card Balances-30% Impact
    This factor marks the ratio between the outstanding balance and available credit. Ideally, the consumer should make an effort to keep balances as close to zero as possible, and definitely below 30% of the available credit limit at least 2-3 months prior to trying to purchase at home.
  3. Credit History-15% Impact
    This portion of the credit score indicates the length of time since a particular credit line was established. A seasoned borrower will always be stronger in this area.
  4. Type of Credit-10% Impact
    A mix of auto loans, credit cards and mortgages is more positive than a concentration of debt from credit cards only. You should always have 1-2 open major credit card accounts.
  5. Inquiries-10% Impact
    This percentage of the credit score quantifies the number of inquiries made on a consumer’s credit within a twelve-month period. Each hard inquiry can cost from two to 25 points on a credit score, depending on the amount of points someone has left in this factor. Note that if you pull your credit report yourself, it will have no effect on your score.

Remember that the credit score is a computerized calculation. Personal factors are not taken into consideration when a credit report is generated. It is merely a snapshot of today’s credit profile for any given borrower, and it can fluctuate dramatically within the course of a week.


How can I improve my credit score?

One method that has been proven to effectively improve credit standing is to maintain one or more open and active revolving credit accounts and manage the credit lines responsibly.

A revolving credit card account with a major creditor that reports to all three major credit bureaus, like Visa, MasterCard, or Discover for example, will deliver the most in reporting benefits. The balance should be kept very low in relation to the available credit limit.

If you’ve been denied credit, a secured credit card is a useful stepping stone to establishing good credit. A secured credit card is a fully functioning credit card, not to be confused with a prepaid card. A secured credit card is “secured” by a cash deposit that you make to the issuing creditor, who holds the deposit as collateral in case you don’t make your scheduled payments.

To get the most benefit from the secured credit card, it is important to use the card, but only for small purchases, and pay it off in full each month. After a reasonable period of time using the credit line responsibly, the positive information being reported can really help to improve your credit rating.

Information for obtaining a secured card can be found with a simple internet search of “secured credit card.”