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How Is Your Credit Score Determined?

There are a number of different institutions that calculate credit scores. Since the FICO score is the most common, this section will discuss how your credit score is determined based on the FICO scoring methodology.

About 35 percent of your credit score is based on your payment record. This is why it is important to pay your bills on time. Do what our prophets have counseled and do not get into debt in the first place. If you are in debt, make timely payments and get out of debt as soon as you can.

Another 30 percent of your credit score is based on the total amount you owe as a percent of your available credit or credit limit. Generally, try to keep your usage of credit below about 15% of your available credit limit. Keep your balances low, especially on revolving debt. A small balance may be helpful as it shows you can manage credit; however, it does not have to be a large amount. If you are hoping to get a mortgage loan in the future, it may be wise to pay off your revolving credit every week so that the amount you owe is a small percentage of your total available credit.

Around 15 percent of your credit score is based on your credit history. You should keep your oldest accounts open whenever possible to show you have learned to manage credit over a longer period of time. However, you do not want to have too many accounts open at one time.

Approximately 10 percent of your credit score is based on your application history. Do not apply for credit too often. If you are applying for a new credit card every quarter, the question arises as to what you are doing with your available credit. For most people, one to three credit cards is generally sufficient. Realize that each time you apply for credit it is noted on your credit report.

Finally, 10 percent of your credit score is based on a credit mix. You do not want to have too many of the same kind of card. Having a Mervyn’s card, a Meier & Frank card, a Sears card, and a Kohl’s card may bring down your credit score, because they are all similar stores. Be cautious of retail stores that offer a 10 to 20 percent discount on your first purchase if you apply for their store credit card. These types of cards can have negative effects on your credit score.


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