Understanding how credit scores are determined has always been a mystery to me and in asking others about it, I realized that most people feel the same way. It is absolutely amazing to me that we know so little about something that has such a significant impact on our lives.  

In an attempt to make Nancy Drew proud, I decided it was time to see what I could find out. I was only more frustrated after searching the internet as the information was overwhelming and inconsistent.  More confused than ever, I decided to attend a class on the topic.

Here’s what I learned…

Credit scores, also known as Beacon scores, are the main indicator used by lenders to determine your credit worthiness. The specifics on how your credit score is determined are as follows:

• 35% of your score is based on your payment history
• 30% of your score is based on your current total debt
• 15% of your credit is based on the length of your credit history
• 10% is based on the type of credit in use
• 10% is based on new credit inquiries

So, what specifically can cause your credit score to be lowered?

• Late payments
• Frequent credit inquiries
• Unpaid accounts and/or accounts that are written off
• Too many credit cards (even if you don’t use them)
• Bankruptcy
• Foreclosure, short-sale or repossession
• High credit card limits (potential for excessive debt)
• Maxed out credit cards
• Consolidating balances can have an adverse effect on your score, depending on the ratio of balance to available credit

Now you know what actions to avoid, I am sure you are asking yourself what you can do to improve your credit score.

Paying bills on time is the single most important contributor to a good credit score. Paying your bill a few days before the due date is also a good practice that can improve your score.  Likewise, reducing the number of credit cards you have open is also a move in the positive direction. A friendly word of advice when it comes to credit cards? Be sure to have the company verify in writing when you close an account.

Go to Annual Credit Report once a year to receive a free copy of your credit report from each of the three nationwide consumer credit reporting companies (Equifax, Experian, TransUnion). While your score is not displayed, this will give you the ability to review both your open and closed lines of credit.

It is also important to pay attention to what you receive in the mail. You may not realize it but often times your credit limit will be automatically increased, even if you did not make that request. Call the credit card company and decline the credit increase.

It is also a good practice to periodically call your credit card companies and find out what your limits are. Consumers do not realize that many companies have actually begun lowering credit limits. This is an important fact to be aware of because when a customer’s available credit goes down, for any reason, it brings the current balance closer to the limit, lowering your credit score substantially.

I’ve found that, when it comes to their credit rating, most people take an “out of sight, out of mind” approach. Correcting mistakes on your credit report is critically important. Most of us don’t realize there is an issue until it is too late, for example, when you are ready to purchase your new home. Catching mistakes early can help you maintain a good credit score and allow you to make those bigger purchases.

From what I’ve learned, I know that this is something I will be keeping a much closer eye on.

- Amanda Serra