What’s in a Credit Score

In light of high credit card debt and delinquent payments, many are worried about how their credit will be effected. This worry is legitimate concern of most Americans. But most people have no idea how the score is calculated. The common conception is that credit scores are good if you’ve “never been late on a payment,” and “you earn a lot of money.” Never being “late on a payment” is only partially true and “earning a lot of money” bears no relevance at all.

The Naked Truth

Credit scores are made up of :

1) payment history
2) debt owed
3) length of credit history
4) new credit
5) types of credit used

The lion’s share of the score is measured by payment history and the amount of debt owed; this is 65% of your credit score. The remaining 45% are still very important to each borrower’s score.

What this means is that focusing on any of these factors, and excluding the others, is detrimental to any borrower. The tendency is to focus intently on never being late on a payment (which is 35% of the score) but ignoring the other 4 factors completely. Borrowers who do this are unpleasantly surprised to find that their scores are often significantly lower than they had anticipated.

Reduce and Repay

A borrower looking to improve their credit score should obviously pay their debts on time, but the next most important thing is to reduce debts where they can. What most people don’t know is that they can negotiate repayment terms with their creditors. However, credit card negotiations can be cumbersome and time consuming. A financial attorney can provide lots of assistance when negotiating with credit card companies and finding debt elimination solutions.