Credit scores help lenders determine whether you pose an acceptable risk for a loan or line of credit. They also influence the terms of your approval — such as your interest rate.
There are several factors that go into calculating your score, including your payment history and amounts owed (including the percentage of available credit you’re using on revolving accounts). Lenders often prefer to see a mix of different types of credit.
Paying Your Bills on Time
Your payment history accounts for 35 percent of your credit score. This factor determines whether you have missed payments, went to collections or declared bankruptcy, all of which can hurt your scores. On the other hand, making all your payments on time establishes a solid track record of responsibility and helps improve your scores. Set up autopay and reminders for the accounts that report to your credit reports, such as your utility bills and cell phone bill. Paying down your credit card balances is also a good way to increase your credit score.
The amount you owe accounts for 30 percent of your credit score, and it looks at the amount of debt you have relative to how much credit you have available, known as your credit utilization ratio. Credit experts recommend keeping your credit utilization ratio below 30 percent to boost your scores.
Credit mix, which looks at the variety of types of credit you have and considers how well you manage them, accounts for 10 percent of your score. This can include installment loans (like mortgages and car loans) and revolving credit, such as credit cards.
Length of credit history contributes 15 percent to your score, and it takes into account the age of your oldest and newest credit accounts. Opening a lot of new credit accounts within a short period of time can send a negative signal to scoring models and hurt your score.
Keeping Your Balances Low
Credit cards are a convenience and a useful financial tool, but if you’re carrying a balance from month to month it can hurt your credit score. Your credit score helps lenders determine whether you can afford a new loan, mortgage or credit card.
Paying your balances in full each month will raise your credit score, and keeping your utilization ratio low will also help. This is the percentage of total available credit you’re using, and it makes up a large part of your credit score. Financial experts advise keeping your credit utilization under 30%, and even lower if possible.
Other factors that go into your credit score include how long you’ve had credit, how many accounts you have and how recently you’ve applied for new credit. But the main factor is your payment history, and there are many strategies you can use to make that a priority in your financial life.
The best credit scores are those that have a long, diverse and stable history. Having a strong credit score is key to securing credit, loans and insurance at reasonable rates. A good credit score can also save you money in the long run by helping you avoid paying more in interest charges and fees than you should. A good credit score can make all the difference when it comes to obtaining loans, credit cards, and even rental properties.
Having a Variety of Credit Accounts
The credit bureaus look at your total number of accounts, the type of account you have, and how recently you applied for new credit. These factors are worth 30% of your score. This is called your “credit mix.” Having both revolving credit (credit cards) and installment loans (auto, mortgage and student loans) is a good idea. These types of accounts are often viewed as more stable by lenders, so having these on your report can improve your scores.
Your payment history, which makes up 35% of your credit score, is considered the most important factor. That’s why making on-time payments is so important. The amount of money you owe in relation to your credit limits (known as credit utilization) is also important. This is why it’s best to keep balances low on your revolving accounts and avoid maxing out your credit cards. The length of time you’ve had credit is another factor that counts for 15% of your score. The older your accounts are, the better for your credit scores. Finally, the number of new credit accounts you have and how quickly you open them are worth 10% of your score. Adding a few well-managed credit accounts to your profile is usually a good idea, but it’s important not to apply for too many new credit cards all at once, as this can work against you.
Avoiding New Debt
The credit scores used by lenders, such as banks, auto loans and mortgages, are snapshots of your credit behavior. These scores are based on information from one or more of the three major credit bureaus, and each has its own formula. Because of this, you never know exactly what your lender or bank will use to assess your creditworthiness when deciding whether to approve a loan application or issue a credit card. Regardless of what your particular lender uses, the best way to increase your score is to practice responsible money management.
This means paying your bills on time and keeping the balances on your credit cards low. You should also avoid obtaining too many new accounts at once, as this can lower your score. And if you do apply for a new account, make sure you are actually approved. Too many inquiries can indicate to a lender that you are a high risk.
The most important factor that determines your credit score is your payment history, which accounts for 35% of your score. Your outstanding debt, the amount you owe compared to your available credit (known as your credit utilization) and how long you have had open accounts also impact your score. Lenders also consider your credit mix, which is comprised of installment accounts like auto, student and mortgage loans as well as revolving debt such as credit card balances.