You know that having a high credit score can make it easier for you to get loans at lower interest rates. Every financial advice article stresses the importance of building your credit. To do this, you first have to understand how your credit score is calculated. Only then can you know how to improve it.
Your credit score is based on five main factors. Each factor accounts for a certain percentage of your score. Here’s a closer look at the five factors and how the role they play in calculating your credit.
Your payment history has the biggest impact on your credit score, accounting for as much as 35% of the total. Payment history takes into account:
A credit bureau tracks and records all your debt payments. The higher your proportion of on-time payments, the higher your score will be. The more payment issues you have the lower your credit score will be. Even a single late or missed payment can pull your score down.
How much you owe has the second highest impact on your credit score. It accounts for 30% of the total. It takes into account:
The more you owe, the lower your credit score. Large debts and credit cards that are always maxed out will lower your score. Smaller balances can help boost your score provided that they are paid on time.
The length of your credit history accounts for 15% of your score. The longer your credit accounts have been open, the higher your credit score. This is provided that you’ve been making your payments on time. Seeing your history of on-time payments helps build trust with creditors. Lenders are wary of lending to someone with no credit history to review. This is because they have no way of knowing whether or not you are a responsible borrower.
Opening accounts frequently indicates possible financial stress, which can lower your score. Every time you apply for credit, it hurts your credit score a little bit. Over time, this can add up and lower your score considerably. Recent credit activity makes up 10% of your score.
Credit mix refers to the types of accounts you have. This could be a mix of home loans, student loans, vehicle loans, credit cards, gas station cards and retail store cards. Your credit mix makes up the final 10% of your score. Having different types of credit accounts and managing them all successfully can help boost your credit score.
Remember, no one factor can determine your credit score by itself. All categories are taken into consideration when calculating your score. Paying attention to each of the five factors mentioned above is the best way to build your credit quickly.
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