Most people understand 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 rather surprising facts about credit scores:
1. Income: Your income level has no bearing on your credit score. A person earning below minimum wage could easily have a great score while a millionaire earning six-figures per year could have a really low credit score. The basis behind the scoring system is to determine how responsible a person is with the money they have, not how much money they make.
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 Collection Agencies: Did you know that paying off collection agencies or debts that are older than two years old 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 old it begins to lose its 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 people that can show the reporting bureaus that they have their spending habits well controlled will be rewarded. When a person is able to keep their balances well below their allowed limit, the score will be increased. It is best to keep all card balances below 30% of the credit limit.
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: It may be hard to believe, but 10% of your score stems from the number of credit applications you have submitted. Each time a creditor pulls your credit history an inquiry shows up on your report. The more inquiries that show up, the lower your credit score will be.
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.
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