My View: The five factors that can make or break your credit score

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It may not be as entertaining as following the score of a Nats or Skins game, but keeping up with your credit score will keep you financially healthy in the game of life.

While many young adults in and around Alexandria think about purchasing automobiles, applying for mortgages or signing up for life insurance policies, many do not understand why credit applications are approved or denied or how interest rates are determined. The difference between a credit approval and a denial or between a bad rate and a good rate is largely based on your credit score.

A credit score, sometimes also called a FICO score, evaluates information contained in your overall credit history. Your credit history is maintained by three separate reporting agencies: Experian, Equifax and TransUnion. So how is your credit score determined? There are five factors:

Factor 1: The largest and most important component of your credit score is your payment history meaning whether or not you have made your payments on time, and whether or not you have any judgments or bankruptcies in your past.  Recent late payments are more harmful to your score than older late payments.

Factor 2: The amount of your current debt, including current and outstanding balances, the average balances you carry and the total credit limits on your revolving debt. If youve made a number of trips to King Street boutiques like The Shoe Hive or Lawrence Miller&Co. and your credit card shows it, try to keep your balances below 75 percent of your available credit limits.

Factor 3: The next factor involved in a credit score is the length of your credit history. Creditors want to see how you have handled credit over the long term. A five-year history is better than a 30-day history.

Factor 4: New credit applications can also affect your score.  Avoid too many inquiries all at once. Anyone applying for a horde of new credit cards is considered a big risk, as it indicates you may be in financial difficulty or you may be overextending yourself.

Factor 5: The last part of your credit score is based upon the types of credit you use. Basically, this just refers to the number of reported accounts in the various credit categories: revolving credit (credit cards), installment loans, mortgages, home equity loans, etc.
FICO scores range from 350 to 850. If you have a score below 500, youll have trouble getting credit. The higher your score, the lower the interest rate you will typically pay.

If your credit record looks bad right now, remember that its not permanent. As long as you change bad financial habits, your improvement will eventually supersede any problems you may have had.

You can check your FICO scores through any of the three credit agencies by visiting their websites. Also, the Fair and Accurate Transactions Act requires these agencies to issue one free copy of a credit report to a person each year.

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