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Credit Score - How much does credit score increase once negative items drop off?
Written by paul on September 10th, 2006 with
1 comment.
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One of the more frequent questions we receive is from people wanting to know how much their credit score will increase once negative items are removed. Unfortunately this is difficult to answer as credit scores are calculated based on several factors. Here’s a quick overview of how your score is calculated. Hopefully this will help:
Payment history: 35 percent of your credit score is based on your payment history. Making regular, on-time payments will help keep your score high. If you want to maintain or increase your credit score it is essential that you make your payments on time. Being 30 days or later on one account can cause your score to dip as much as 100 points.
Amount Owed: 30 percent of your credit score is calculated based on the amount you owe on your current debts Surprisingly, your income amount does not affect your FICO score, although some lenders will ask for the information to calculate debt to income ratios for their own purposes.
Rather than using debt to income, your credit score is calculated by comparing how much you owe to your available credit limits. Anything higher than 30% will have an adverse affect on your credit score. Want a better score? Keep that number at or below 25 percent. Don’t worry about maintain large amounts of unused credit, your FICO score won’t be affected if you have large amounts of credit available however, some lenders may use available as part of their lending process.
Length of credit history: 15 percent of your credit score is based on the length of time you have had credit. This is the one category over which you really have no control. Lenders want to know how long you’ve been managing your credit and as far as they’re concerned, the longer the better. For creditors, time equals stability. So if you have a good long-term history with a credit card and you’re not using it, this could be another good reason to keep it open and active.
Interest in obtaining new credit: 10 percent of your credit score is based on the amount of new credit you apply for within a given period of time. How do the credit reporting agencies, know that you’re looking for credit? They keep a record of every time someone accesses your credit report. These requests to see your credit history are known as “inquiries.”
There are two kinds of inquiries, and it pays to know the difference. A hard inquiry is when you actually apply for credit and the potential lender pulls your report. That actually will lower your score. While there seems to be no hard or fast rules for just how much it could hurt you, it’s best to avoid hard inquiries if you’re about to go shopping for a home or auto loan.
It is also important to know that if you are shopping for a new car loan or mortgage that multiple inquiries from different lenders within a short period of time does not have a drastic affect on your credit score. Normally all inquiries for the same type of credit within a two week period are counted as one inquiry for credit scoring purposes.
If you’re not actually asking someone to consider you for a loan, that’s called a “soft inquiry.” Some examples are when a current creditor wants to look at your report, you ask to see your own credit history, or a potential creditor wants to scope you out without your permission. Soft inquiries don’t affect your score because they do not indicate that you’re out shopping for more debt.
To keep your credit score high, it is wise to apply or credit when you need it. And if you’re getting ready to buy something big, like a home or a car, hold off on applying for other types of credit.
Mix of credit/miscellaneous: This is kind of a catchall category that accounts for about 10% of your credit score. It’s main purpose is to analyze whether your financial history shows a mix of different kinds of loans, like mortgages, revolving loans and installment loans. If it does, you demonstrate that you can responsibly manage more than one type of credit.
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September 24th, 2006 at 7:06 pm
[...] Your FICO or credit score is a number based on various aspects of your credit report and is provided to anyone who views your credit report to assist them in judging your creditworthiness. Approximately 30 % of your FICO score is based on your current credit usage and considers how much you owe on a current loans, how much of your credit limit on your cards is used. If your outstanding balances are close to your credit limits it has a negative effect on your FICO score and vice versa. [...]