In the world of credit, your repayment history reflected on your credit report impacts the likelihood of future loans and lines of credit. You might get a loan with a low credit score, calculated from entries on your credit report, but you’d pay a higher interest that reflects a higher risk than would someone with a high credit score that reflects a high probability of timely repayment. Each credit reporting agency (CRA) – Equifax, Experian and TransUnion – reflect differing scores, and knowing how your credit score is usually calculated can help determine a solid priority list when you want to clean up your credit history.
Most credit scores range from 350 to 850 points. The CRA does not determine what entries are displayed. They don’t contact your actual or potential creditors to update or add information. They only report what has been reported to them. Any errors on the report are corrected by the actual creditor. You can lodge a dispute or explanation against entries, but you should seek removal from the actual creditor for best results.
Credit Score Influences
From those entries that are reflected, your credit score is computed from any or all of the following categories.
1. The number of accounts you have. Some entries are better than none, but none is better than bad or too many entries. If any entry on your credit report erroneously reflects an open balance, but it has actually been resolved, have the creditor note the entry as closed. The “open” annotation could indicate to potential creditors that you might be overextending your ability to repay.
If a negative entry is old, have it removed. Some entries must say on your report longer than others, but all have expiration times. Check with the agency whose report you drew for those expiration times.
If you have duplicate entries, for loans are often sold to other organizations, ensure the old entry notes the transfer. Otherwise, your credit report might reflect, for example, that you have two car loans when in actuality, the single loan was merely sold.
2. The types of accounts you have. Several credit card entries could indicate to potential creditors or lending agents that you are paying bills off credit cards, reflecting your ability to pay. These entries also include just the inquiries, noted at the bottom of the report in most cases. For instance, f you apply for several credit cards during the same 90-day period, that indicates over-extension as well.
3. Your available credit. If you consistently keep your balance-due low, you show responsible financial management. You are conscious of your financial obligations, and you don’t live beyond your means. Keep your available credit limit reasonable and favorable for the best influence on your credit score.
4. The duration of your credit history. The longer you have applied for, gained and resolved credit matters favorably, the more reliable you are as a borrower. Build your credit slowly with a positive slant, and you will enjoy good credit transactions for many years.
5. Your payment history. This factor is extremely important. Paying at least the minimum due on outstanding debts maintains an excellent repayment history. “Robbing Peter to pay Paul” – borrowing or combining one debt’s payment with another payment – is not financially healthy. You have a category score for each debt that reflects whether you were late with payments or missed payments altogether. If all else is equal, it’s that repayment history that can determine higher or lower interest or the viability of a new loan or line of credit.
Check your credit regularly. Check the credit reports of every member of your family regularly, including your children’s: Child credit theft is on the rise. Errors are made but can be devastating if not corrected. Protect yourself, and protect your family.
Written by Jaye Ryan, a freelance author who likes writing about credit management for Octopus Loans.