To answer the question “How can I repair my credit rating?" you first need to know how your credit score is calculated. There are five factors that are involved. These are payment history, amount owed, length of credit history, type of credit and new credit. What these terms mean and how they affect your credit score will be discussed in the following paragraphs.
Payment History. This is where any missed payments are recorded. Even if you have made the payment but it was late and did not arrive until after the due date, it will still be noted in your payment history.
Amount Owed. This is the total amount of credit that is outstanding at any one time. The balances on all your loans and credit cards are noted under this heading. As well as the total debt, the proportion of your approved credit is also taken into account. For instance, if the total outstanding is only half of the amount of your approved credit limit, then your credit score would be higher than someone whose credit cards were all maxed out.
Length of Credit History. The longer the better is the general rule. It stands to reason that someone who has used credit for a number of years will be regarded more favorably than another person who has just taken out his first loan two or three months ago. This is the reason why it is sensible not to close all old accounts, but to keep at least one open, even if you are not using it, to keep the record of your credit history.
Type of Credit. This factor is not a case of one type of credit being preferred to another, rather that lenders like to see that you are using a variety of different loans. For instance, if you have a mortgage, a car loan, home improvement loan as well as two or three credit cards, this will tend to boost your score.
New Credit. This is the last of the five factors that are used to calculate your credit score. What counts here are both the number of loans that you have taken out and applications that you have submitted, even if you did not accept the offer of credit. This is the reason why making multiple applications for credit, for instance to check whether you can get better terms from a particular lender, can have an adverse effect on your credit score.
The final point to note is that some of the five factors have more effect on your score than others. In fact they have been listed in order of importance. Payment history accounts for 35% of your score, amount owed 30%, length of credit history 15%, type of credit and new credit 10% each. From this you will see that making payments on time and not borrowing right up to your limit are the factors that contribute most to your credit score. So concentrating on these two factors is the first step in answering 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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