Credit Score calculations can feel confusing and intimidating. However, it really comes down to just five main factors that credit scores are calculated from. It can be much simpler to improve your credit score by focusing on ways to improve in these five areas. Despite there being a variety of methods that are used to calculate credit scores, the most common and most significant factors are described below:
Payment history is one of the most important factors in credit scoring, and even a single missed payment can have a negative impact on your score. The higher your credit score, the better rates you are likely to get on loans and mortgages. A good credit score is around 700. You can improve your credit score by paying your bills on time and avoiding costly credit card debts and other loans that you may not be able to pay back. A poor payment history can lower your credit score, which could make it harder to obtain a loan or get a better interest rate on a mortgage. Lenders want to be sure you will be able to pay back your debt, and on time. 35% of your FICO Score is based on this factor.
Your credit utilization ratio is the percentage of your available credit that you are using. A high credit utilization ratio can indicate that you are spending more than you are able to borrow, which can lead to financial difficulties. A low credit utilization ratio can indicate that you are using your available credit responsibly and have a good history of paying your bills on time.
Your credit utilization ratio is the percentage of your total revolving credit you are currently using. This number can be used to see how reliant you are on non-cash funds. Using more than 30% of your available credit is considered a negative for creditors, which may impact your ability to get approved for future loans. 30% of your FICO Score is based on this factor.
Credit history length is the next factor that affects your credit score. The longer your credit history, the better your credit score will be. Having a longer credit history simply provides a greater and more reliable foundation of data for lenders to base their decision to lend or not to lend. Your credit history makes up 15% of your FICO Score.
Your credit mix includes the types of loans and credit accounts you have open. People with good credit scores often have a diverse portfolio of credit accounts, which might include a car loan, credit card, student loan, mortgage or other types of loans. Credit scoring models consider the types of accounts and how many of each you have as an indication of your ability to manage a variety of loans.
The number of credit accounts you've recently opened, as well as the number of hard inquiries lenders make when you apply for credit, can impact your FICO Score by 10%. Too many accounts or inquiries can indicate increased risk, and could lead to negative consequences like a lowered credit score.
Now that you know what factors are taken into consideration, you can take steps towards improving in these 5 areas.
Your credit score is a key factor in buying a home. Qualifying for a mortgage and getting the lowest possible interest rate can be difficult if your credit score is low. Since a mortgage to buy a home is most often the largest loan most people will ever take on, it's a good idea to […]
If you are having trouble getting your credit score, or if you have been denied a loan or credit card because of your credit history, you may be considering hiring a credit repair company. A credit repair company can help you improve your credit score. But how do they work? Do they really help people […]
Society is becoming increasingly dependent on using credit to make purchases and decisions. Nowadays, having a good credit score is beneficial for more than just the obvious cases of getting a credit card or a loan. More and more businesses are making the case that you must have good credit before they can offer their […]
Getting approved for a mortgage
Securing good rates on a car loan
Getting a low-interest credit card
Borrowing money from a prime lender