How Can I Repair My Credit Rating?

Before you can address the question "How can I repair my credit rating?" you need to understand what information is used to arrive at your credit score. Information is recorded under five separate headings. These are payment history, amount owed, length of credit history, type of credit and new credit. In this article we will look at what these terms cover and how each impacts on your credit score. 

Payment History. This is the record of your reliability in making payments on time. Any missed payments will be recorded here, as will any that did not reach your account until after the due date.

Amount Owed. The sum total of your borrowings are noted here. The current balances on all your lines of credit including credit cards and other loans are aggregated and recorded under this category. In calculating your credit score, it is not only the total amount of your debt that is considered, but also the proportion that this bears to your approved credit limit. This means that someone whose total loans are nearly up to their credit limits will have a lower score than someone else who is only borrowing half of what has been approved.

Length of Credit History. In general the longer that an individual has used credit, the better this is for his credit score. Not surprisingly lenders prefer to deal with people who have a satisfactory credit record covering a period of years rather than a first time borrower. For this reason it makes sense to keep one or two old accounts open even if you are no longer using them. 

Type of Credit. Lenders prefer borrowers who are using a variety of different forms of credit. This means that if you are like the average person and have a mortgage, your car on hire purchase, a loan you used to pay for your swimming pool and several credit cards, your credit score will benefit.

New Credit. This is the final element used in the calculation of your credit score. This covers loans that you have taken out recently. It also covers loan applications, so making a number of applications, even if you do not use the credit in the end, can have a detrimental effect on your credit score. Having said that, there are special provisions whereby a number of applications made in a short period of time for the purpose of checking competing offers can be treated as a single application.

It is important to understand that the five factors do not all have an equal effect on your credit score. Payment history is the most important making up 35% of your credit score. Next comes amount owed which accounts for 30%. Credit history adds 15%, and the remaining 20% is split equally between type of credit and new credit.  As you can see  payment history and amount owed together account for 65% of the total. This shows that making your payments on time and keeping well within your credit limits are the first steps in answer to the question "How can I repair my credit rating?".