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How Credit Scoring Works

No matter what you think of Donald Trump (or his hair style) – we can all agree that the man knows a little sumptin sumptin about money. 
So, when I ran across this article in The Trump Blog, I thought the info in it would be worthy to share with you.
The article talks about the fact that “basically ALL lenders use “risk-based pricing” or “tiers” when determining what interest rate to offer. The methodology behind this is to fairly compensate lenders for the risk they are taking by lending money.”
The magical way that they determine just how much of a risk you really are is by using a mysterious number we all know as a credit score.   
The article goes to say that there are “5 ways a person’s credit score is derived.”  It also goes on to say how the various parts of our financial lives are weighted to come up with the credit score.  According to the article, the breakdown is as follows:

35% – Payment History
30% – Amounts Owed/Balances
15% – Length of Credit History
10% – Types of Credit
10% – New Credit Inquiries/Accounts

The article goes on to say that:

Now more than ever, every FICO point matters and keeping our scores maximized will allow us to potentially save thousands of dollars in interest over our lifetimes. For example, with Fannie Mae or Freddie Mac backed financing, a borrower will pay over ½% more in rate if they put 20% down and have a 719 credit score rather than a 720. 
My advice is to be vigilant in your participation of activities which may lower your scores and beware of too many inquiries. It is said that inquiries can cost you 3-5 points each time your report is pulled. 

If your credit score is high (over 760), congratulations!  You’ve been doing something right! 
But if it isn’t as high as you’d like, here are some ways to increase your score.

  1. Pay down your credit cards and revolving debt.
  2. Don’t use your whole credit line every month, even if you pay your balance off in full every month.
  3. Ask a friend or family member to add you as a card user to an established credit card.  (You don’t have to use it, just be listed as an account holder.)
  4. Dispute old negative charges if they are incorrect.
  5. Look for any errors and contact the creditor and ask them to correct the information.

Most importantly, use your credit wisely.  It’s much easier to have a good handle on your credit score if you never abuse your credit to begin with.