5 Factors That Affect Your Credit Score
Understanding how your credit score works can be one of the greatest arsenal in building and improving your credit. Like anything in life, you can’t effectively perform your job if you don’t fully understand how to use the tools around you. These 5 factors isn’t just about paying your bills on time and having a bunch of credit lines open. Its a delicate balance of utilizing your credit properly, and winning the credit battle.
Here we will explain to you the 5 scoring factors that determine your overall personal credit score . Obviously, the better you score in each factor, the higher your credit score will be.
- Payment History (35%) – Paying on time
- Debt Utilization (30%) – Keeping your balances on your credit cards low
- Credit History and Age (15%) – How long you’ve had your credit lines open
- Credit Inquiries (10%) – Applications to open new accounts
- Types of Credit (10%) – Mix of different types of credit lines
As you can see, payment history is the biggest player leading the group with 35%. This is the most important component of your credit score as it shows whether you can be trusted to repay the money that is lent to you. So take the time to commit and pay your bills timely, this will ultimately build a trust to lenders that you can pay on time. If you haven’t had the cleanest record, here are some items that could affect your payment history factor.
- Being late – There are 30, 60, 90 and 120 days of being late and the the longer it is, the worse it affects your score
- Placed in collections – have you completely stopped paying? This could potentially show lenders a RED flag that you can’t pay what you owe
- Having charge offs, debt settlements, bankruptcies, foreclosure, liens or judgements against you are the worst things to have on your credit report.
The next biggest player is debt utilization at 30%. It is the second most important component of your credit score, since it shows how much you owe against your overall credit lines. Normally the lower the amount the better, and having a little amount is better than having zero balances.
Sounds strange right?
Its better to have a small balance than a paid off-balance… why?
Lenders want to see that you know how to handle balances and is financial responsible enough to pay them back. Having a zero balance for months does not show much for the lender on how you handle credit, so it’s usually best to have a very small balance than a zero balance.
Here are some factors that affect debt utilization.
- How much do you owe on your credit lines, such as mortgage, auto loans, credit cards and installment accounts? A mix of accounts is good and shows you handle different forms of credit.
- The amount you owe in comparison to the original amount on installment accounts.
- The amount of total available credit.
Credit History and Age
Credit history and age is pretty straight forward. This factor is determined from how long all of your credit lines have been open. The longer the account has been opened, the better it is for your score depending if you have had on time payments. Also, closing out an account could potentially decrease your score. If you were to close out an old account with positive history, it would erase whatever history you had.
- Your oldest account
- Average age of all your accounts
- Consistent on time payments on accounts
Opening a new account or applying for a new line of credit places a mark on your record. Inquiries are normally performed before an application is either approved or denied They are pulling up your credit history and score to assess your risk. These inquiries normally have small impact, about a 5-10 drop on your score.
Applying for several credit accounts in a short period of time represents a greater risk for future lenders. Statistically, people with six or more inquiries on their credit reports are more likely to declare bankruptcy than people with no inquiries on their reports. However, this a very minimal in assessing your overall risk. They would factor in your payment history and age, along with the overall debt. Also, credit inquiries contributes only 10% of your credit score.
Types of Credit
This will only account for 10% of the your credit score. They want to see whether you have a mix of different types of credit, such as credit cards, store cards, car loans, a mortgage, etc. They also look at how many accounts you have active. While, its best to have a mix of credit types open. You should not worry too much about having so many different accounts. It will happen naturally as you progress through life. When the opportunity comes and you need it, then apply for it. Just don’t go out applying everywhere, use only the credit you need as you go along.
For example, if you shop at Macy’s often and see the benefits of their reward program, then you probably should apply for their credit card.