Most people know the fact that their payment history has an impact on the credit scores, but there are a few additional factors that are used by the credit bureaus to calculate your score.
Here are 5 facts about credit scores that might surprise you:
1. Income: Your level of income has no bearing whatsoever on your credit score. A person that earns less than the minimum wage could have a fantastic score while a millionaire that earns six figures each year might have a poor credit score. The scoring system is used to determine whether or not a person is responsible with the money they have, not how much they earn.
2. Age of Accounts: When the credit bureaus calculate your score, they study the type of accounts you have and the age of your accounts. An account with some age shows potential lenders that you have never negotiated or consolidated your ancient debts. Instead you have been able to maintain them a high level of responsibility. If you need to pay off some of your debts, pay the newer ones and leave the older ones alone if at all possible.
3. Don’t Pay Collection Agencies: Did you know that paying off collection agencies or debts that are older than two years ancient won’t help your credit score? The Credit Bureaus calculate your score using the last date of activity on your account, so if the last date of activity is over two years ancient it starts to lose its negative power.
Keep in mind that if you speak to a collection agency and set up a payment plot this may be looked at as an agreement and the date may be listed as the date of the conversation. This type of contact can reset the time period on the date that you have the conversation.
4. Debt/Limit Ratio: The credit reporting bureaus reward those people who can show that their spending habits are controlled enough to not require them to max out their credit balance or overdraw their credit limit. Make sure that all your balances are way below your actual credit limit to increase your credit score. Keeping your card balance below 30% of your credit limit will certainly improve your score.
Always remember that banks make their profits by keeping you in debt. It does not hurt to increase your credit limits as long as you act responsibly and only use an amount you can handle based on your income.
5. Frequency of Credit Applications: Did you know a full 10% of your total credit score comes from the number of times you’ve applied for credit? Every time someone pulls your credit, the enquiry is listed on your credit report. The more enquiries shown on your report, the lower your score will go.
If you’ve recently filled out a bunch of credit applications you should spend some time paying down your balances before applying for anything further. By not applying for new accounts you will be able to increase your score as the older applications drop off.