Many of us are oblivious to our credit scores and often times only pay attention to it when circumstances such as buying a home, a car, or opening a business are in the picture. Credit scores are important to have if you ever decide to get a loan. These are number that lenders use to determine the risk of lending you money.
Credit scores can range from 300 to 850. The higher the score you have, the better for your financial success. There are three credit agencies that compile credit scores. They are Experian, Equifax and TransUnion. You may have multiple credit scores based upon who provided the score, but they generally paint the same picture of your credit history. It can help to understand what factors affect your credit score so you’ll have an idea what and where to improve.
Payment History
Your payment history is the biggest factor that affects your credit score. It accounts 35 percent of your total score. The payment history shows your credit trustworthiness. Paying your bills on time is one of the best ways to maintain a good credit standing. Paying bills late on the other hand, will have a negative effect on your score.
Amounts Owed
30 percent of the total credit score is based on your credit utilization. It is the second most important factor that affects your credit score. How much credit have you used from your total available credit? FICO says it is best to owe less, the lower your credit utilization is the better. A credit utilization ratio of approximately 35% or less is good.
Payment history and amounts owed make up nearly two-thirds of your credit score. So if you are lagging behind on credit card payments and/ or maxing up your credit card limit, now is a good time to change your habit. If you pay your bills on time and you don’t use credit too much, your credit score is already in good standing.
Length of Credit History
15 percent of your credit score is based on the length of time your accounts has been open. A long credit history offers a better picture of financial behavior. If you have been using credit for longs and it’s not marred with negative report, it will surely help build your score. A short credit history is also fine as long as you’ve made payments on time and you don’t used too much credit.
Credit Mix In Use
Credit mix accounts for 10 percent of your credit score. Do you have a mix of different types of credit, such as credit cards, store accounts, installment loans, and mortgage loans? The credit mix usually won’t be a key factor in determining your credit score and if you don’t have any of these accounts, do not open new if you don’t intend to use it just to have a mix of credit type.
New Credit
Opening new accounts rapidly will have a large effect on your score – not in a good way. If you’ve opened several accounts recently, you could be a greater credit risk. Research shows opening several new credit accounts in a short time period represents greater risk. People tend to open new accounts when they are experiencing cash flow problems or planning to take on new debts.
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