Have you ever wondered how the credit reporting companies derive your credit score? Well, the answer, unfortunately, is not that simple. But, as with anything, knowledge is power, and the more information you have, the better equipped you will be to effect positive change to your credit score.
No matter what your credit score may be, there is always room for improvement and understanding how credit card repayments affect your credit score can make for marked improvement in your overall score if you have ever paid your credit card bills late. In conducting our own research, we have found that payment history makes up about thirty five percent of your total FICO score.
Credit Card Repayments And Your Credit Score
To provide a little background, FICO, the company, was founded in 1956 by Engineer Bill Fair and Mathematician Earl Isaac. They provided consulting services and developed enterprise decision management systems, one of which is the widely known FICO system, a credit score modeling system that has become the standard by which all consumers’ credit is measured. The FICO score is calculated statistically, with information from a consumers credit file. Banks and other lending institutions use the FICO score as a snapshot or measure of risk to assess creditworthiness and make lending decisions based on individual customers. Consumers with higher FICO scores are far more likely to receive better interest rates on automobile loans and mortgages than consumers with lower scores.
Although there is a lot of information available, no one but the credit bureaus or agency making the credit determination, has all the answers to what you can do to improve upon your credit score. Scoring systems are complex and can vary among creditors, but one thing is certain, how you repay the debts you owe is a heavily weighted factor in any credit determination and scoring models seemingly consider certain types of information in your credit report in compiling your score. Some of the information we have uncovered is what follows and by asking and answering a few important questions you too can be on your way to improving your FICO score.
Do you pay your bills on time? As stated previously payment history can be a significant factor in the determination of your overall score. If you pay your bills late, or have accounts that have been referred to a collection agency or declared bankruptcy, these can seriously and adversely affect your score.
Another important consideration, are you maxed out on all your credit cards? Just because you may pay your credit debs on time, your score will be negatively impacted if you have reached or exceeded the limits set by the card issuer(s).
Also, is your credit history relatively new or do you have a substantive historical credit record that can be considered? In general terms scoring models use the length of your credit record as a measurable and quantifiable element. A history that is short in length of years will probably be scored lower than one that is lengthy in term. However, making on time payments and maintaining low balances can merit additional points in your favor if your credit history is short.
- Applying for too many or too much credit can also impact your credit score negatively.
- Consider when you apply for new credit or a loan, that creditor is going to do an inquiry into your credit history.
- Have too many inquires can adversely affect and impact your total score.
- Also having too many credit accounts can negatively impact your FICO score.
- Though in general terms it is a plus to have established credit accounts, too many credit card accounts will likely reduce your score. Paralleling the conception of too many credit accounts, can be what type of credit accounts you have.
For example, some scoring models consider loans from finance companies to be negative and therefore will reflect a negative measurement in your report.
As you can see from just a few of the known measurements used to calculate your credit score there are even more variables that relate to each situation that will affect your credit score positively or negatively. How credit card repayments affect your credit score is merely one aspect to a very intricate and complicated credit modeling system although it is one that logic would suggest will ultimately help to enhance your overall score.
Properly designed credit scoring systems enable the user to make faster, more accurate and even more impartial decisions than individual people or employees can make regarding a prospective consumers ability to pay, therefore managing the lenders exposure to risk and ability to continue to lend money. Individuals whose credit scores are not high enough to pass easily or low enough to fall out of consideration completely, will be referred to a credit manager for discussion and/or further negotiations.
To avoid such situations, consider how credit card repayments affect your credit score every time you sit down to pay your bills. Research ways to maximize the possibility of your creditor receiving your payment on time, most banks provide bill pay services you can set up online to automatically pay your bills every month. This is a great service financial institutions now offer and they are easily setup. Once you input all the information required for each creditor and input the due date, you payment will always be on time provided you maintain enough of an available balance in your account to pay your bill.
Again, we all have more we can do to enhance our credit scores, being responsible consumers, living within our means, and using the good old fashioned common sense most of us have deep down inside can go a long way to curing most any problem we face.
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