The first, and most important, thing you need to know about the 3 credit bureaus

The credit bureaus are not goverment agencies. They are privately owned companies that make billions of dollars from selling YOUR credit report. And how they report that data is where the problem is. Read more

How your credit score is calculated

No one knows for absolute certain the exact formula that is used to calculate a score, but we have a good idea of the approximate percentages for credit events and how they are affect the final number. Read more

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No one knows for absolute certain the exact formula that is used to calculate a score, but we have a good idea of the approximate percentages for credit events and how they are affect the final number.

Your credit score is comprised of a variety of factors. The chart to the right shows the approximate breakdown of these factors, but isn't necessarily the exact percentage. However, it is the best representation of what industry experts believe to be the truth of how your score is calculated.

The most important factor is your payment history. Late-pays are very damaging to your score. The more recent they are, the more damage they do. Being 30 days late on a payment can cause upwards of 20 points deducted from your score.

The next important factor is your total debt compared to your income. This number isn't necessarily the total amount of bills that you have on a monthly basis, but only the total amount that is being reported on your credit file. If you have 3 credit cards that show the monthly payment of $50, then your overall debt (as calculated in the scoring model) is $150. If you are renting your home, this is not calculated into the score unless your landlord is reporting you to the credit bureaus.

Your total debt takes into consideration the balances on your accounts as well, also known as your utilization. If you have a $500 credit limit and have a balance of $300, your total utilization is over %50 of your available credit. The best scenario is to only be using less than 30% of your total available credit. This shows lenders that you can use your credit responsibly, as opposed to "maxing out" your credit.

The next factor is your length of credit history. The older the account the better it is working for you. Lenders like to see at least 2 years of good-standing account history. Now, this doesn't necessarily mean that you are going to be denied credit if you only have a year of history. It does mean that you may not get the best rates, or the higher limits, until you can establish a longer history.

Next is your "new credit". Every time you apply for credit the lender performs a "hard inquiry" for your credit file. These types of inquiries remain on your credit for 24 months, and are calculated into your score. Most inquires only affect your score for about 1 year, but having multiple inquires within that first year can drop your score by 5 or more point per inquiry. The best scenario is when applying for credit to spread it out over a year or more.

The only caveat to this is that multiple inquires for the same type of credit in a small period of time are usually counted only once towards your score. This means that if you apply for an auto loan through the dealership, and they send your application to multiple lenders, this only counts as one inquiry. The best thing to do is to arrange your own financing through your bank or credit union, and then go to the dealership with your approval papers.

The last factor is the type of credit lines that you have. The best is a mixture of mortgage, auto, installment, and revolving lines of credit. This means that you should spread your credit across as many categories as possible in order to have the best score. Applying for and having 5 credit cards doesn't do you any good as compared to an auto loan and 3 credit cards.