Getting Out of Debt Fast

Understanding Your Credit Score

Some people get confused between the difference of your credit report and your credit score. Your credit report is a history of the type of borrower you have been. Your credit score is a subjective evaluation of your credit history. Lenders use this information to determine your level of risk and how likely it is you'll pay them back on time.

Credit score, credit rating and FICO score are often used interchangeably and basically they are different terms for the same thing. The three major reporting agencies (Experian, Equifax, and TransUnion) each report their own credit scores. It's not unusual for these three scores to vary slightly for each other. The more responsible you are with credit, the higher your credit score will be.

Your payment history accounts for 35% of your credit score. The highest weight is placed on your highest payment. So for example, if your mortgage is your largest payment that will have more weight than a smaller payment. Late payments will have a negative impact on your credit score. The severity of the negative impact depends on how much time has passed and the number of times you've been late on that account. Always try to pay your bills on time.

Your debt to available credit accounts for 30% of your credit score. You want this ratio to be no higher than 50% of your available credit and it is preferable to keep this ratio to under 30% of your available credit. This ratio applies to lines of credit such as credit cards and does not typically apply to mortgages or installment loans.

How long your credit history is accounts for 15% of your credit score. If you have a long history of making your payments on time you will have a good credit score. One thing that can hurt you is if you close old accounts that you've had for years and made payments on time. Closing old accounts wipes out all your payment history for that account. If you have older accounts that you've managed efficiently, than keep them open and use them once every six months or so to keep them active.

The types of accounts or mix of accounts makes up 10% of your credit score. Credit bureaus like to see a mortgage, an auto loan, and three to five credit cards. If you have a Home Equity Line of Credit (HELOC), it will be treated as a revolving account unless it is greater than $40,000, in which case it will be treated as a mortgage.

How many inquiries you have for your credit score account for approximately 10% of your credit score. Each time an inquiry is made points will be taken off your overall score. However, multiple inquiries for things such as a mortgage or a car loan within 45 days will be considered that you are shopping around and will be treated as one inquiry. Inquiries for a job, insurance or utilities, an account review, a promotion or your own personal review won't affect your credit score.

Being 30 days late on a payment can damage your credit score by at least 50 points. Being late by 60 or 90 days, or being late 30 days on multiple accounts will lower your score by at least 100 points. Having a debt to credit available ration higher than 50% can negatively affect your credit score by as much as 100 points. Remember that every financial choice you make can and will affect your credit score.