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You're Not Stuck With Your Credit Score

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Hugh Harris-Evans

"How can I repair my credit rating?" Before you can start to answer this question, you need to ask another "How is my credit score calculated?" There are five elements that are used to produce your credit score. These are payment history, amount owed, length of credit history, type of credit and new credit. What these terms cover and the effect that each has in the calculation of your credit score forms the basis of the remainder of this article.

Payment History. If you have missed any payments, this is where they will be recorded. Not only missed payments, but late payments are also recorded under this heading.

Amount Owed. This is the total you owe at any one time. All your different types of credit, ie mortgages, loans, credit cards etc, are added together and the total is recorded here. The other factor that is considered here is the amount of your agreed credit that you have used. If your credit cards are all maxed out, then your credit score will be lower than your friend who is still well within his limit.

Length of Credit History. The longer the better. It is no surprise to learn that banks and other lending institutions like to see a credit history covering a period of years, so that this will result in a higher credit score than for someone who has taken out a loan for the first time a few months ago. This is why it is a good idea not to close all your old loan or credit card accounts, but to keep one or two open for the benefit of your credit history.

Type of Credit. Having a number of different types of credit is a good thing. Someone who has a mortgage, a car loan, a personal loan as well as three or four credit cards is preferred by lenders to another person who is just using one type of loan.

New Credit. This is the final piece of the jigsaw that goes towards the make up of your credit score. This looks at the number of loans that you have taken on in the recent past. In addition to the loans themselves, this category also includes loan applications. It follows that multiple loan applications are not a good idea and will do nothing to improve your credit score. In fact they will have the opposite effect.

The five factors described above are all used in calculating your credit score, but some have more weight than others. In fact the type of credit and new credit, covering recent loans and applications, have the least effect on your credit score, being responsible for 10% each. Credit history accounts for 15%, but amount owed at 30% and payment history at 35% are the two most significant factors used in the calculation. From this it is clear that ensuring that you make all your payments on time and keeping your borrowing well within your credit limits will be a major part of the answer to the question "How can I repair my credit rating?".

Hugh Harris-Evans writes on financial matters and is the webmaster of Credit Card Cleanup.com where you will find further articles on credit repair and tips on how to make the most of your credit cards.

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