Your credit score is a strong number that can affect your life now and in the future – in ways, you might not even imagine. Your score determines the interest rates you pay on credit cards and loans and helps lenders decide whether or not you are even approved for these credit cards and loans.
Unexpected businesses, such as insurance companies, have begun to use credit scores to decide about you. Utilities check your credit score before you set up a new service in your name, and some employers check your credit history, but not your actual credit score to decide whether you get a job, a salary increase, or a promotion.
Protecting and building your credit is more important than ever, and how you deal with the following five factors can be critical in determining your credit score.
1. Your Bill Payment History
The payment history determines 35% of your credit score. In fact, the timeliness with which you pay your bills affects your credit score more than any other factor. Serious payment problems, such as debits, debt collection, bankruptcy, repossession, tax liens, or foreclosure, can destroy your credit score, making it almost impossible to obtain approval for anything that requires good credit.
The best thing you can do for your credit score is to make your payments on time every month.
2. Your Debt Level is Important
Your level of debt determines 30 percent of your credit score. Credit scoring calculations, such as the FICO score, consider some key factors related to your debt. The amount of total debt you carry, the ratio of your credit card balances to your credit limit, also known as credit utilization, and the ratio of your credit balances to the original loan amount.
As a guide, you should leave your credit card usage at 30% or less, i.e. only charge up to 30% of the available limit of a card.
High balances or too much debt can have a big impact on your credit score. The good news is that your credit score can improve quickly if you repay your balances.
3. Age of Credit History
How old is your oldest credit account? The credit age is 15% of your credit score and takes into account both the age of your oldest account and the average age of all your accounts. An “older” credit age is greater for your credit score because it expresses that you have great experience in handling credit. Opening new or closing existing accounts can lower your average age of credit. Therefore, it is usually not a good idea to open several new accounts at once.
4. Types of Credit on Your Report
There are two essential kinds of credit accounts, revolving accounts, and installment loans. Having both kinds of accounts on your credit report is better for your credit score because it shows that you have experience in managing different types of loans.
It is even better if, in addition to credit cards, you have loans for various types of assets such as a car or home and perhaps a student or personal loan. However, the types of credit only make up 10% of your credit score, so it will not destroy your score if you do not have a certain type of credit, such as an installment loan.
5. Number of Credit Inquiries
The application you submit Every time requires a credit check. A request is made to your credit report indicating that you have made a credit-based application. Requests account for 10% of your credit score. One or two requests will not do much harm, but multiple requests, especially within a short period of time, can cost you many points from your FICO score. Keep your applications to a minimum to maintain your credit score.
The good news is that only those requests that were made within the last 12 months will be included in your credit score. Inquiries disappear completely from your credit report after 24 months.
Note that checking your own credit report will result in a “soft” request that will not affect your credit score.
Factors That Don’t Affect Your Credit
It is a common thing that some factors affect your credit score, but they do not – at least not directly. Information such as income, bank balance, and employment status may affect your ability to be approved, but they do not really feed into the algorithm that calculates your credit score. Age, marital status, and the use of debit or prepaid cards also do not affect your credit score.