Your credit score is more than just a number. It reflects your creditworthiness, influencing your ability to secure loans, get favorable interest rates and can impact your financial future. But have you ever wondered how this important number is calculated? Here are the top five factors that contribute to your credit score.
Note: These factors can vary slightly depending on the credit reporting agency.
Payment History
Your payment history is the most significant factor when it comes to calculating your credit score. Credit reporting agencies will track how consistently you make payments on your credit accounts, including credit cards, auto loans and mortgages. By making timely payments, you are demonstrating responsible financial behavior. However, that also means if you regularly miss payments, it can have a big negative impact on your score.
Credit Utilization
Your credit utilization is the ratio of your current credit card balances compared to your credit limits. For example, if your two credit cards have a combined limit of $15,000 and your current combined balance of $2,500, your credit utilization would be about 17%. Higher credit utilization suggests higher risk as it might indicate too much reliance on credit. For a healthy score, it is recommended to always keep your credit utilization below 30%.
Credit History
Your credit history is the length of time your credit accounts have been open. A longer credit history tends to be more favorable as it provides a clearer picture of your financial habits and responsible credit management. Hint: Before closing any old credit cards, consider how long you’ve had the credit account open and if closing it will negatively affect your credit history.
Types of Credit
Having a diverse credit portfolio can show your ability to manage diverse types of credit responsibility. It’s best to have a mix of credit types, such as credit cards, installment loans, mortgages, etc.
New Credit Inquiries
Opening several new credit accounts in a short period of time can be seen as risky behavior to creditors. Each new credit application can result in a hard inquiry, which can temporarily impact your score.
Note: When applying for a mortgage, it is best not to apply for any new credit until after you close on your new home. Even a slight change to your credit report in between can affect your home loan closing successfully!
Remember, your credit score is not set in stone! It is a dynamic number that changes periodically depending on your financial behavior. If you have less-than-perfect credit, do not sweat it. By practicing responsible credit management, paying bills on time, and maintaining a balanced credit utilization, you can positively influence your credit score over time.
