Your credit score has a lot of power over your life, from the interest rates you get when buying a car, to getting a job. You probably know what that three-digit number means—and how it affects you—but you may not know all the factors that figure into that score. Understanding the circumstances that play into your score will help you plan the most effective ways to build and protect it. Here are five items that determine your score and a few ways to keep track of it.
1. Payment history
Your payment history is the biggest single factor when it comes to figuring your score. It makes up 35% of the calculation in your FICO score and is very influential in your Vantage Score, the other prominent credit-score model. Payment history boils down to whether you’ve paid your bills on time—or not. A single late payment won’t negatively affect your score. However, if that one-time late payment becomes a trend, it will.
Missing a payment anytime will affect your score regardless of whether it’s on your credit card account or mortgage. If you’ve had a bill sent to collections, that will also have a negative impact. Time is your friend here. As time passes, these missed payments are seen as less important.
Charge offs, debt settlements, bankruptcies, foreclosures, liens, and public judgments are the biggest red flags on your credit report.
2. Amount of debt
Even if all your accounts are current, if you have a lot of debt, it will cost you. Credit utilization is how much credit you’ve used versus how much you have available. For example, if you have a single credit card with a $1,000 credit limit and have put $500 on the card, your credit utilization rate is 50%. Credit utilization makes up 30% of your FICO credit score and is very important to your Vantage Score.
If you use more than 30% of your available credit, that could have a negative impact on your score. Keeping this rate even lower than 30% lower is better. Interestingly, creditors want to see you owe a bit of money. That shows you’re responsible enough to pay what you owe. Don’t assume you have to have a $0 balance all the time.
3. Length of credit history
Credit score models look at two factors to determine the length of your credit history: the age of your oldest account and the average age of all your accounts. Your credit history makes up 15% of your FICO score, so it’s less influential than your payment history and credit utilization ratio. The longer your credit history, the better. If you open new accounts, it can lower the average age of your credit.
Here’s a tip: Even if you’ve paid off credit cards and don’t intend to use them again, don’t close the account. Keeping it open adds to the length of your credit history.
4. Mix of credit accounts
Variety isn’t just the spice of life, it’s a benefit for your credit report. Creditors like to see different types of loans and lines of credit. For example, a mix of a car loan, mortgage, credit card, and student loan would benefit you—as long as you’re paying on time. You’ll note this example includes a combination of installment accounts with fixed payments, such as car payments, and revolving accounts, like credit card accounts. Credit score models like to see that mix in your history.
5. New credit inquiries
There are two types of credit inquiries. Soft credit inquiries don’t show up on your credit report. When you check your own credit, it’s considered a soft inquiry. Hard inquiries, when potential creditors pull your credit report, show up on your report. Hard inquiries can lower your score slightly. The score algorithm assumes that if you’ve opened accounts recently, you could be experiencing cash flow problems or are planning on taking on new debt. That would make you a greater lending risk. So, you may want to be strategic and avoid multiple hard inquiries at the same time.
New credit inquiries make up about 10% of your FICO credit score. Credit inquiries only factor into your score for 12 months; they disappear completely off your report after two years.
What Doesn’t Affect Your Score
You might be surprised to find that income, bank balances, and employment status don’t affect your credit score. They may influence your ability to be approved for loans; however, they don’t factor into that all-important score. Your net worth, age, education, and whether you receive government benefits also won’t affect your credit score.
Ways to Track Your Credit Score
As you’ve seen here, a variety of factors affect your score, and it can fluctuate frequently. Making a habit of checking your score will help you make strategic purchases—and it will help you spot any instances of identity theft that pop up on your report.
Free credit monitoring services can help you stay informed. Credit Sesame taps into your score to give you the latest info and recommendations on how to improve your numbers. Credit Karma provides credit score monitoring via two of the three credit reporting companies, TransUnion and Equifax. You can go straight to the source by consulting your score with Experian credit reporting agency. Once you know your number, you can use that information to either improve or maintain your credit. State ECU is here and we can help you build a stronger financial future.
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