Here is what the credit bureau uses to calculate your score, in order of importance:
Payment History:
The bureau factors in when you last paid an account late, how often you pay late and by how many days.
Recommendation: Set up automatic payments to guarantee you're always on time. One skipped or late credit card payment can drop your score by 100 points. Pay bill punctually and you might improve your score within months.
Total Debt:
In general, the greater debt load you carry works against you.
Recommendation: Use your credit cards regularly, but keep balances below 35% of available credit limits. The people with the best credit scores tend to use only about 10% of their available credit.
Duration:
The longer you have had an account the better. A late payment on a one-year-old account will hurt your score more than if you'd had the card for two decades.
Recommendation: Avoid opening new accounts unless necessary, and keep you oldest credit cards active, assuming you pay as required.
If you don't use a credit card you may be at risk of losing the card. You may want to arrange for a regular expense such as a utility payment to be automatically be covered. You can pay this off every month and it will show usage and repayment planning.
Don't apply for credit you do not want or need. Every time you apply for credit your credit score is reduce by one point.
New Credit:
Apply for credit in moderation. Multiple request for credit can be a sign that you are a distressed borrower. The credit bureaus factor in the number of new accounts you have opened, as well as the number of inquires ( there are two kinds), for your credit score.
Recommendation: “Hard” inquires, when you actually apply for new credit do have a negative impact on your score. You are protected when you squeeze applications for a mortgage or say a car loan into the same 14 day period, as they will count as a single inquiry. That is not the case if you apply for several credit cards in a short period of time. “Soft” inquires, meanwhile, don't count against you for example request you make for your own credit score.
Banks and Insurance companies are now routinely checking account holders credit scores. If your score has dropped, they may increase your interest rate or reduce your credit limit. As of September 2010, credit card companies must give advanced notice of interest rate increases prior to their taking effect.
Types of Credit
Credit bureaus look at the number and quality of each type of account. For instance, a credit card from a major bank carries more weight than one from a department store.
Recommendation: You need a long history of excellent payments with a few different types of credit. Revolving accounts (credit cards) tend to count more the installment loans (mortgages, student loans) because they are better predictors of debt management.
Paying down installment loans on a timely basis generally reflects well on your credit score. Try to pay down the loan as quickly as you can. Consolidating or moving your debt around from one account to an other usually won't raise your credit score.
If your mix of debt is considered off balance, it can hurt your credit score. For example, it is possible to have too many credit cards, but not enough of other types of loans. For the average Canadian, one all purpose credit card should be adequate.
Adapted from an article by Beth Kobliner
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