5 Factors That Determine Your Credit Score
5 Factors That Determine Your Credit Score

5 Factors That Determine Your Credit Score

Although credit affects many aspects of day to day living, you along with many other individuals may brush it off as something that is not necessary.  This is far from the truth.  Credit affects your ability to get loans, get apartments, buy a home, qualify for better payment plans, buy a car, and even land your dream job. The idea of building credit and repairing credit are concepts that are not always easy to grasp. So, let’s start with the basics.

What is Credit?

Credit represents how risky you are to a lender when it comes to borrowing money.  So, the higher your credit score is, the lower the risk you have.  The lower the score you have, the riskier it is to lend you funds.

What factors determine your credit score?

#1 Payment History

Your payment history makes up 35% of your credit score.  This means that it makes the largest impact on whether your credit score goes up or down.  When you make payments on time to the debts you owe, then you gradually start to build good credit.  Having late payments, not being consistent, or missing payments altogether accounts for building poor credit.  In many cases, payments are reported to bureaus after they are late at least 30-60 days. 

Further delays in making a payment, such as going months, can result in your debt being given to collections.  Collections means unwanted harassing calls and a serious drop in your credit score.  What’s even worse is that it takes at least 7 years for late payments and debt in collections to fall off your report.  So, just remember, it takes a short time to destroy your credit and an even longer time to rebuild it.

#2 Utilization

Your utilization makes up 30% of your credit score and has just as much impact as your payment history.  Utilization is how you are using your available credit limit.  For example, if you were given a credit card with a limit of $1,000 then you only need to spend no more than $300 of that credit limit.  This is because good utilization for a line of credit is 30% and under. 

The less you spend the better.  Many people are under the misconception that getting a line of credit like a credit card is fine to use as long as it is paid off on time.  This actually backfires because they weren’t taught the key is utilizing 30% or less in combination with making payments on time; therefore, their credit score suffers.

#3 Credit History

The length of your credit history makes up 15%.  This can slightly affect someone new to building credit.  Basically, your credit history is just as old as your oldest account.  This means that closing older accounts and opening new accounts can impact your credit.  If you have an older account that is benefiting you, then I suggest keeping it open and paying it to increase your credit history.

#4 New Credit and Hard Inquiries

This category accounts for only 10% of your overall credit score.  New credit is when you open new credit accounts.  In many cases, opening too many new credit accounts within a 6–12-month period can harm your credit because it makes you look high risk.  For example, if you get several credit cards or loans within a 6–12-month timeframe it can lower your credit. 

Hard inquiries occur when you apply for credit.  So, applying for things like credit cards and loans could show up on your credit report.

#5 Credit Mix

Having a credit mix means that you have a mix of different types of open credit accounts, and this accounts for 10%.  Not all of your accounts are the same type.  There may be diversity on your credit report such as credit cards, loans, mortgage, and so forth. 

Now that you are aware of what goes into factoring credit scores, what steps will you take to build or repair your credit score?

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