Question

1. Explain the five main factors that go into determining your credit score.
2. Describe the things you could do to either improve your credit score, maintain your high score or to start to build a credit score according to which is your particular situation.

Answer 1

Solution:

The five main factors that go into determing credit score are:

1) Payments history: Payment history is one of the most heavily weighted factors in generating your credit score because it shows lenders that you’ve been reliable in making consistent on-time payments – an indicator that you’re likely to pay back your debts in the future. For this reason, just one or two late payments could drag your score down significantly.

2) Amounts owed: Amounts owed is the second-most influential category when it comes to your FICO Score. Worth 30% of your FICO Score, the amount of debt you carry (especially credit card debt) is nearly as important as whether you pay your bills on time.High credit utilization levels indicate that you’re a higher risk borrower. So, your credit score will likely be lower if you tap into too much of your credit card limits.

3) Length of Credit history: Establishing a long credit history usually helps your credit score as long as you have a consistent history of on-time payments on your open accounts. Factors that are considered include how long your credit accounts have been open (the age of your oldest account, the age of your newest account and an average age of all your accounts), how long specific credit accounts have been established and how long it has been since you used each account

4) Types of Credit: Number and mix of credit accounts that you have in use – credit cards, auto and student loans, mortgages and other lines of credit – all contribute to your credit score. Generally, having more open credit accounts translates into better credit scores. Why? Having more accounts means you’ve been approved for credit by more lenders. Additionally, having a diverse mix of credit across the two main categories – revolving credit and installment loans  – can increase your credit score

5) New Credit: Lenders who see that you have numerous recent inquiries may worry that you are applying at several places because you’re unable to qualify for credit or may be desperate for money. According to FICO, research shows that consumers opening multiple credit accounts in a short timeframe indicates greater risk – especially those who don’t have a long credit history.

Things to do to imrove your credit score:

1 - Make every payment on time: Do you already have late payments on your credit reports? Thankfully, they’ll impact your credit score less and less as time passes. Credit scores pay more attention to recent late payments than they do late payments made in the past.

Eventually (after 7 years), old late payments will fall off your credit report completely.

2 - Pay down credit card balances: When you reduce your credit card debt, it should trigger a decrease in your credit utilization ratio. Lower credit utilization may impact your credit score in a positive way — sometimes significantly.

3 - Ask a loved one for help: Do you have a friend or family member who might add you to an older credit card account as an authorized user? If so, the account might help you increase your average age of credit and, by extension, your credit score.Just be sure the account has on-time payment history and a low utilization rate before your loved one adds you.

4 - Consider adding a new account: You shouldn’t open accounts you don’t plan to use in an effort to improve your credit mixture. However, if you only have credit cards on your credit report, adding a credit builder loan might benefit you. The opposite is true as well.

Just be sure that whatever type of account you open, you manage it well with on-time payments and (if applicable) low utilization.

5 - Limit credit inquiries: It’s fine to check your credit report as often as you like. Doing so will never harm your credit score. But you should only let lenders pull your credit when you really need something.

For example, it’s generally fine to apply for a new account because you’re working to establish or rebuild credit. Yet you’ll want to avoid applying for a new retail store card at checkout because you want a 20% discount on your purchase.