Do you feel you need an advanced degree to understand what factors actually affect your credit score? The good news is, you don't - it can be pretty simple.
Behind the number itself (credit score usually ranges from 300 to 900) there are five main factors used to calculate credit score. Lenders use these factors to determine how likely you are to repay your debt - so these results are often the deciding factor in getting a new loan or a credit card.
If your financial profile changes, so will your score. So knowing what factors and account types affect your credit score can help you improve it over time.
The 5 most important factors that affect your credit score
While the exact criteria used by each scoring model vary, here are the most common factors that will affect your credit score. Apply For home improvement loans.
Payment History: Payment history is the most important component of your credit history, and missed payments can negatively affect your score. Lenders want to make sure that you pay back your debts on time when they consider approving a new loan. Payment history accounts for 35% of your credit score.
Amount Payable: Your credit usage, specifically represented by your credit usage, is the second most important factor in determining your credit score. Your credit utilization ratio is calculated by dividing the total revolving credit you currently use by the total number of all your revolving credit limits. This ratio looks at how much of your available credit you are using and can give you an idea of how much you rely on non-cash funds. Using more than 30% of your available credit is negative for creditors. Credit utilization makes up 30% of your credit score.
Credit History Duration: How long you have had a credit account is 15% of your credit score. This includes the age of your oldest credit account, the age of your youngest credit account, and the average age of all your accounts. In general, the longer your credit history, the higher your credit scores.
Credit Mix: People with the best credit scores often have a diverse portfolio of credit accounts, which can include car loans, credit cards, student loans, mortgages, or other loan products. The credit scoring model looks at the types of accounts and how many of them you have to show how well you manage a wide variety of credit products. Credit mix equals 10% of your credit score.
New Credits: The number of loan accounts you recently opened, as well as the number of hard inquiries from lenders when applying for a loan, make up 10% of your credit score. Too many accounts or hard inquiries can increase your risk and affect your credit score.
Comments