Your credit score is comprised of multiple factors, but its foundation lies with payment history and debt utilization. Paying down balances on credit cards demonstrates responsible debt management and has a beneficial effect on your score.
Your length of credit history and average age of accounts are both considered. Incorporating different credit types – installment and revolving accounts like credit cards and loans – into your profile may help to strengthen it further.
Payment History
Lenders and other credit-scoring models utilize your payment history – which accounts for 35% of FICO(r) Score and similar percentages in VantageScore models – as one way of gauging the reliability of borrowers. Paying on time early in your credit history history is key in building up good scores; late payments have an especially detrimental effect, especially recent ones which may cause significant reduction in score.
Debt utilization rate, or outstanding balances, accounts for 30% of your score and experts advise keeping it below 30%.
Average account age accounts for 15% of your score, and should include both revolving credit and installment loan accounts. Lenders prefer seeing an extended history of responsible usage and repayment of credit accounts.
Make payments on time – whether for one account or multiple. Set reminders on your phone or email so you’ll never fall behind in paying bills, and aim to clear off balances before their due dates pass. Establish a budget to manage debt responsibly.
Amounts Owed
Your debt contributes 30% of your credit score and one important aspect is how much of it you use (known as your utilization rate). Maxed-out cards tend to damage scores more than empty ones and credit bureaus look for individuals with low utilization rates; you can reduce it by paying down balances.
Credit bureaus also consider how much debt a person owes overall, the type and age of this debt, including installment loans like auto or mortgage loans as well as revolving credit like credit cards.
Timely repayment of an installment loan demonstrates responsible debt management, which can boost your scores. On the other hand, bankruptcy, foreclosure and collections accounts can have devastating effects on them.
Length of your credit history accounts for 15% of your score, showing lenders that you’ve been responsible with past debts. Opening new accounts may cause some slight decrease in score due to hard inquiries they cause – though typically only by a few points; hard inquiries (those made by lenders) tend to remain on your report for a minimum of one year before being removed from it altogether.
Length of Credit History
Credit scoring companies employ various formulas to generate scores, with five factors bearing most weight: payment history, amounts owed (including credit utilization ratio), length of credit history and credit mix. Acknowledging these factors may help you take steps to increase your scores and open the door for better credit card offers, increased limits and more advantageous loan terms.
As part of your FICO and VantageScore scores, length of history accounts for around 15% and 21% respectively. Lenders tend to prefer borrowers who have established credit histories as this shows they’ve handled credit responsibly over time and will more likely repay debt on schedule.
As your credit history gets longer, so will the points earned from having various types of accounts (revolving, retail, installment loans and mortgages) reporting to credit bureaus. Furthermore, credit mix accounts for 10 per cent of your score which could make a significant impact when lenders evaluate your creditworthiness.
Before applying for loans or credit cards, it’s usually wise to avoid opening new lines of credit in the months prior. Hard inquiries to open new accounts count against your score and can indicate financial difficulties.
Types of Credit
This factor considers both your credit type (installment loans such as student and auto loans and mortgages) and use of revolving accounts such as credit cards. A mix of accounts generally helps improve scores because it demonstrates responsible management. Opening too many new accounts too quickly may harm them as lenders perceive this as being indicative of financial trouble.
Credit utilization, or the percentage of your total credit limit you use, can have a dramatic effect on your scores. Both FICO and VantageScore consider your utilization rate an important factor, and keeping balances to under 30% across all revolving accounts (i.e. credit cards and HELOCs) is best.
Other factors affecting your credit score may include your address, demographic information, employment status and income – which cannot be altered but may still have an effect. It is wise to steer clear of negative items on your report such as late payments, collections or judgments as these can remain on there for several years and affect both your score as well as chances of getting new credit in the future.
