How is Your Credit Score Calculated? | Mortgage

Most consumers are aware that their payment history has a direct effect on their credit rating, but there are a number of other factors that credit bureaus use to calculate your credit score.

by KurtNovak

Most consumers are aware that their payment history has a direct effect on their credit rating, but there are a number of other factors that credit bureaus use to calculate your credit score.

Here are 5 rather surprising facts about credit scores:

1. A persons income level has nothing to do with their credit score. You could easily see a millionaire that earns six figures a year with a very low credit score. You could just as easily see a person that earns minimum wage with a strong credit score. The scoring system is used to measure how responsible a person is 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 old 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 the Collection Agencies: If you pay off collection agencies or any debts that are more than two years old your credit score will not be improved. The credit score is calculated using the last date of activity, so if that date is more than two years ago it starts to lose it negative power.

You should be aware though that if you negotiate some sort of payment plan with a collection agency, this will be considered an agreement and the date of activity can be shown as the date of the conversation.

4. Debt/Limit Ratio: The credit bureaus reward the people that are able to control their spending habits and are not required to max out their credit cards or exceed their credit limit. Keep all of the balances well below your credit limit if you want to increase your credit score. You will be able to improve your credit score by keeping your balances lower than 30% of your limit.

Remember that when you are in debt, the banks are profiting. It won't hurt to increase your credit limit it you are able to act responsibly and only use the amount that you can comfortably handle with your current income.

5. Frequency of Credit Applications: 10% of your credit score is based on the number of times you have applied for credit. When a potential lender pulls your credit history, the inquiry shows up on your credit report. The more inquires that you have the lower your score will be.

If you know you've already applied for a lot of credit, then spend a few months and pay down your balances before you apply for anything new. The simple act of not applying for new credit will increase your score as older applications fall away.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

Author Kurt Novak is a full time real estate investor who helps home owners avoid foreclosure. His blog shows how to find the best Columbus Loans and how to increase your Crdit Report.