Getting Out of Debt Fast

Credit Score Basics

A credit score is a snapshot of your credit standing at a particular point in time. A credit report summarizes your credit risk based on your historical data while the credit score is a subjective evaluation of that historical data. Lenders use this information to determine your level of risk and how likely it is they will be paid on time.

There are three major reporting agencies (Experian, Equifax, and TransUnion). Each agency reports their own credit scores so the scores can vary slightly between each agency. Lenders will look at your overall credit worthiness. In reality, is comes down to whether you pay your bills and pay them on time. Lenders will also check to make sure you are not overextending yourself financially.

Your payment history accounts for 35% of your total credit score. The highest weight is given to the highest payment, such as a mortgage and then works down through smaller payments. Any type of bankruptcy, liens, collections and judgments will have a negative impact on your score. Late payments and the number of times you were late on a payment will also have a negative impact.

The amount of credit you owe in relation to the amount of credit that is available to you accounts for 30% of your score. You want to keep this ratio as low as possible for a higher score. Typically, mortgages and installment loans are not factored into this ratio because they are not considered lines of credit.

The length of time you have been making payments on time or your credit history accounts for 15% of the total credit score. A word of caution, if you have old accounts that you no longer wish to use but they have a long credit history don't close them because this will wipe out a large chunk of your history. Instead, use the account once or twice a year to keep the account active. That way all the history is retained.

The different types of credit such as mortgages, credit cards, student loans, and automobile loans that you have had accounts for 10% of the score. If you have a Home Equity Line of Credit (HELOC) it will be treated as a revolving account unless it is over $40,000 then it will be treated as a mortgage.

Inquiries, which is when a lender requests your credit score, accounts for 10% of the total score. However, if you are shopping for a car and there are several dealerships that request information within a 45 day period, it will be considered as only one inquiry. Only the first ten inquiries count each year. When inquiries are made for a job, insurance or utilities, an account review, a promotion, or your own personal review, they will not affect your credit score.

The important thing to remember is that your credit score is a reflection of your actions. If you are 30 days late on a payment, your score can drop 50 points or more. If you are 60 or 90 days late on a payment, your score can drop 100 points or more. If your credit cards are maxed out or approaching the maximum available credit, your credit score will drop by at least 80 points. Make good financial choices to keep your credit report healthy.