A credit score is derived from your credit report and used to predict how likely you are to repay a loan in a timely manner. Different scoring models exist, but most credit scores range from 300-850. The higher your credit score, the better.
There are many myths surrounding building credit, so it’s best to start with the basics. If improving your score is on your to-do list, understanding credit scores and learning about the factors that influence your score is a great place to start.
5 Credit Score Factors
Payment History (35%)
Since this factor is weighted heavily, it’s wise to start with focusing on improving payment history. By simply making payments on time, you’re positively impacting your score. To ensure on-time payments and to help keep your accounts in good standing, create a list of bills, set reminders on your phone, or enroll in auto pay.
Amounts Owed (30%)
This takes overall debt and individual balances into account. Ideally, you’re keeping balances to a minimum and not exceeding a utilization ratio of 30%. This means you’re using less than 30% of the amount of your line of credit on each account. To maintain low balances and avoid accumulating interest, pay your balances in full whenever possible and pay more than the required minimum payment.
Length of Credit History (15%)
Older accounts are rich in credit history and give lenders a better sense of your borrowing behaviors. The more mature your accounts, the better. If you’re thinking about closing an account, consider the impact. Leave the card at home or shred it. An account in good standing will eventually cease to be reported. Additionally, closing an account could increase your utilization ratio by decreasing the credit available to you.
Credit Mix (10%)
Having a mix of different types of credit accounts can help demonstrate responsibility with credit. This may include installment and revolving loans that come in the form of auto loans, mortgages, student loans, credit cards, etc. Note: It’s best to keep credit cards and personal loans to a minimum as they tend to have higher interest rates and can contribute to living beyond our means.
New Credit (10%)
Having too many inquiries in a short period can appear to be a sign of financial distress to creditors. Apply for new credit sparingly and only as needed. Special one-time offers may tempt you to apply for credit, but it’s important to keep the long run in mind. It’s best to only open accounts you will actively use.
These tips will get you on the road to having a solid credit score. Have more questions? Watch our Credit 101 Webinar for more info.
Interested in learning more about credit scores or reviewing your credit report with a financial counselor for free? Connect with our partner in financial education, BALANCE.GET STARTED