Your credit score is important, most people know that, but what many people don’t know is which components have the biggest impact on that score. The answer might just surprise you. We’re going to dig into the factors that impact your credit score calculations the most, and what you can do to make yours look as good as possible. Let’s get to it.
Payment History (35%)
The biggest factor in your credit score calculation is your payment history. Lenders are looking at your payment history to determine how well you can make payments according to the monthly payment agreement. Having late payments for credit cards, loans, or other credit accounts can reduce your score considerably.
Credit Utilization (30%)
Credit utilization is the ratio of your total amount of credit, compared to the total amount of that credit that you’ve used. In most cases, having less than 30% is ideal. This means if you have two credit cards with a $5,000 limit each, and one is maxed out, you have a 50% credit utilization ratio and should try to pay off roughly $2,000 to be at 30% or less.
Length of Credit History (15%)
The length of your credit history accounts for 15% of your total score, and it is the indicator of how long you can keep accounts open. A longer credit history indicates a more stable financial lifestyle. Lenders want to see that you have a history of responsible credit use, so older accounts that are in good standing can become quite valuable to your score.
Types of Credit (10%)
One thing that few people consider is the credit mix or types of credit. If you have $10,000 in credit, but it’s all in 4 or 5 credit cards, that earns you a lower score than having, for example, a $5,000 limit card, a $2,500 personal loan, and $2,500 left on an auto loan in good standing. Having your credit spread across multiple products is important.
Recent Credit Inquiries (10%)
Finally, recent credit inquiries also factor in. Anytime you request new credit, your lender will perform a “hard inquiry” on your report, which can lower your score for a while. Multiple inquiries in a short time can look like financial distress to lenders, so spacing out applications is important.
Tips for Improving Your Credit Score
- On-Time Payments: It should go without saying that if your payment history is more than a third of your score, making all of your payments on time will help give your score the biggest boost.
- Lower Credit Utilization: Pay off outstanding balances, and avoid adding any more credit debt.
- Keep Old Accounts Open: Account age plays a role in your credit history, so as long as your accounts are in good standing, keeping them open makes you look better.
- Maintain Diverse Credit: Make sure you have a blend of credit cards, loans, and other credit products to show your financial responsibility.
- Limit Hard Inquiries: Only apply for a new account or card when necessary, and ensure the applications are spaced out to limit the impact on your score.
For Financial Guidance & Education Trust Cash Link
Knowing what factors go into your credit score calculation means you have the information you need to start making highly effective changes in your habits. Improving your credit score will have a positive effect on your overall financial health, and by following the tips we’ve talked about here, you’ll be on your way to making sound decisions for your finances. For more information, or to browse lending products, reach out to Cash Link USA.
