Everyone knows the importance of a good credit score. A strong score offers lower rates and a higher likelihood of lenders extending credit to you. In the U.S., 90% of all lending decisions use the traditional FICO model for credit scores. Although a majority of the algorithms used to calculate scores are a closely guarded secret, FICO has made 5 main components public that play an important role in determining your credit score.
Payment History makes up 35% of your score and carries the most weight of all the factors. It is essential to pay bills on time and not allow items to go to collections. If you have struggled to make timely payments in the past, work to ensure all current bills are being paid on time.
Utilization affects 30% of your score. Simply stated, utilization looks at how much of your available credit you are currently using. Ideally you should never carry balances on your credit card that are more that 30% of the available credit. Any higher and it could start to affect your score. Focus on consolidating debts and paying down credit cards to improve your score.
Length of credit history makes up 15% of your score. If you haven’t had credit for long, there’s not much you can do to make your history longer. Just make sure you have a good payment history and utilization on what you have opened, since these weigh much more heavily. If you have a long credit history, avoid closing out older credit cards, unless you are paying fees, and avoid opening several accounts at once, as this will lower your average overall credit history.
Recent activity makes up 10% of your score. Opening several accounts at once (typically in a 3-6 month time frame) can impact your score. It can also make creditors wary to lend to you, as it can indicate financial trouble. Inquiries and a lower average account length can lower your score. What if you’re rate shopping for a large purchase such as for a car or home? Not to worry. Even though each inquiry will show individually on your credit report, many credit companies will count all inquires as one when calculating your score, as long as they are within a certain time frame, typically 14 days.
Credit mix is the last 10% of your score. It is good to have a variety of credit to show lenders that you can manage several different kinds of debt. Credit mix also plays into credit utilization. Only having installment credit with no open revolving will make it appear as if you are utilizing all of your available credit, thus potentially lowering your score.
Remember, nothing on your credit is permanent. Poor payment histories and prior collections will eventually fall off your report. By focusing on these 5 factors going forward, you will see a positive impact on your credit score.
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