So how is your credit score determined?
Your credit score is made up of 5 different factors:
1. Payment History (35% of total score)
This part of your score takes your credit history into account. It takes into consideration whether loans are paid on time or whether there's any sort of adverse public records (judgements, bankruptcies, liens, etc.) If there are loans that are past due, this part of your credit report really gets hammered.
Untrue to popular belief, simply paying off a bad loan will not instantly improve your credit. Granted, it'll help, but it won't nearly undo the damage caused by letting it get to the point where a collection agency is involved.
Every credit report lists all your credit accounts (except, interestingly enough, your mortgage) and gives you a nice summary under every credit card, car loan, or any other item about any time you were late. Even if you were only late once, it'll be on there.
2. Amounts owed (30% of total score)
As you can see, these two factors are by far the most important in determining your credit score.
This part of your report is relatively simple. It looks at the amount owing on all your accounts, and also the number of accounts you have. Simply put, lots of accounts will hurt your credit. Also, if you're right near the limit on all of your accounts, this will also hurt your credit. So if you have more than 3 credit cards, crack out the scissors. Also, don't apply for credit cards just to get free crap.
3. Length of Credit History (15% of total score)
Here's a big problem for many people in their early 20s. They have problems getting credit because of their lack of history, so therefore have problems building up their credit.
A simple way to get around that is for the parents to step in, and co-sign for any loan their young adult children want. I'm also a big fan of 18 or 19 year olds getting one credit card. (Notice I only said one) Anyone with a pulse and a job can get a card with a $500 limit, and once they start using that responsibly, that'll start improving their credit.
4. New Credit (10% of total score)
This is where people who have been shopping for a mortgage can see their score dive. This part of your report will be negatively affected by either lots of new accounts being opened, or by a great number of inquiries in a short amount of time.
Equifax has stepped in to help those people who's credit was getting hammered when they were shopping for a mortgage. If there's lots of inquiries on your credit within a 30 day span, your score will not be negatively affected. Note: Equifax knows the difference between an inquiry from a bank for a mortgage, and from a credit card company.
5. Type of Credit Used (10% of total score)
This part of your credit report looks at the number of various types of accounts. So if you have lots of unsecured debt (credit cards) vs secured debts (auto loans), this part of your report will be affected.
So now that we've looked at what's in your report, in part 3 I'll give some tips on how to improve your score.