Your credit score is a three digit number that will have a huge impact on your quality of life. This number can save you money or cost you money in high interest rates and down payments.

The credit bureaus use an equation to calculate your score. They do not release this equation to the public. They are scared that people will use that information to improve their credit score.

You would assume the credit bureaus would want people to have a good credit score. However the credit bureaus customers are the lenders. It is in the lenders interest for the borrower to have damaged credit. This way they can charge higher interest rates and earn a bigger profit.

Below are the five factors the credit bureaus use when calculating your score. You will also find the approximate weight that each factor carries in the equation.

1. Payment History (40%)

This is the most important. Your credit report shows your balance, your payment history, your credit limit and the minimum payment.

If your credit card is constantly maxed out, then your score will be lower. However if you can make hefty payments on your balance this can help your score.

Negative items fall into this category. You should remove any negative items. This is accomplished by settling the debt or disputing the accuracy or validity of the item.

I would recommend first disputing the negative item. Then if this is unsuccessful make a settlement agreement with the company that bankruptcy lawyer created the negative item. In this agreement you should have the company agree to remove the item from your report in exchange for payment. I recommend getting this agreement in writing.

2. Ratio of Available Credit to Debt (30%)

In other words how much credit do you have that is not being used? Are all your credit cards maxed out?

If you can show the credit bureaus that you have available credit it will help your score. I suggest keeping a credit card balance at 10% of your limit. This helps because you are showing that you use your credit and you use it responsibly.

3. Pursuit of New Lines of Credit. (10%)

How frequently is your credit checked? If it appears that your credit is being checked constantly then your score will be negatively impacted.

It is reflected in your credit report every time someone checks your report. So if you are buying a new car every six months or switching your phone plans it will not help.

However the threshold of this varies between credit bureaus. There are a certain number of inquiries that credit bureaus expect to find on your credit report.

Just try to avoid making a lot of purchases using your credit. There are people that switch phone plans and buy cars multiple times in a year and this will hurt your score.

4. Credit Experience (10%)

Do not worry about this factor. It only shows the purchases that you have made using your credit.

Meaning is your credit used to finance a mortgage, student loans, credit cards, auto loans, and etcetera. The more diverse your purchases the better however this factor will not make or break your credit score. Thus don't worry about this factor.

5. Length of Credit (10%)

How long have you been using your credit? Did you just get your first credit card?

You should not worry about this factor. Individuals that are new to using their credit can still have a good score.

In sum, only worry about the first two factors listed. However for your own knowledge the other three are looked at when your score is calculated.

If you take care of the first two factors then your score will be high. With a high score you can take advantage of rewards, automatic approval and save thousands with low interest rates.

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