Your credit score is an important number that can have a big influence on your life and finances both now and in the years to come. The number helps lenders and insurance companies, among others, determine everything from interest rates to mortgage and credit card approvals, so it can make a big difference in the terms you’re able to get and the amounts you’ll end up having to pay. Additionally, many employers use a credit check as part of your background screening when making an offer of employment or considering giving you a promotion, meaning your score could have an impact on your career, too. Whether you already know your score or you’re looking to get a free credit score check, working to improve your number can have several positive effects on your finances and is often more than worth the effort. Sometimes, though, the way the number is calculated can seem complicated and difficult to decipher. Thankfully, it’s not as convoluted as it might seem. There are several factors that are consistently taken into account when calculating your score.
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1. Whether You Pay Your Bills On Time
Perhaps unsurprisingly, one of the biggest factors in determining your score is your bill payment history. Late or missed payments, especially if they happen on a regular basis, are notorious for lowering credit scores. In fact, by some estimates, this alone accounts for over a third of your credit score, so if you can only focus on improving one factor, this one would be it. Additional payment-related issues like tax liens, bankruptcy, foreclosure, repossessions or having debt go to collections can also be devastating to your credit score and take a while to recover from. To avoid this pitfall, always try to make your payments on time every month. You can even set up automated payments or add reminders to your calendar to help keep you on track, especially if you have several payments whose due dates are easy to get confused.
2. The Age of Your Oldest Account
This factor may come as a surprise, but the age of your oldest account is actually part of calculating your credit score. In fact, your credit history age accounts for about 15% of your credit score! While this might seem counterintuitive at first, the reason for using it is that it demonstrates to lenders that you have plenty of experience with handling credit responsibly. Additionally, you should know that when you open new accounts or shut down old ones, your credit score could be affected. Try to avoid opening multiple accounts at one time, as this could indicate to lenders that you may be having problems managing your money.
3. Your Debt-to-Credit Ratio
Another factor that determines up to 30% percent of your score is your level of debt relative to your amount of available credit. This is often referred to as your debt-to-credit ratio or amount of credit utilization, and indicates to lenders whether you’re responsibly handling credit or going in over your head. The typical rule of thumb in this arena is to keep the amount of credit you use to 30% or less of your credit limit. For instance, if you have a credit card with a $10,000 limit, you’ll want to keep your spending on that card to no more than $3,000 at any given time. If you’re already over this limit, the good news is that paying off the bill and getting rid of the balance can quickly help your score rebound.
4. The Diversity of Your Assets
While you might think that simply having a credit card is enough to achieve an excellent credit score, to truly raise your score, you’ll likely need more than one type of credit account. This shows lenders that you can handle different types of credit, which looks good on your report. The two main types of credit accounts are installment loans and revolving accounts, but having other assets can be helpful, too. For instance, if you have a mortgage, a car loan or student loans, making on-time payments every month for each could help demonstrate your responsibility and creditworthiness.
5. Not Having Enough Accounts
You might think that having a lower credit limit is better for maintaining a good credit score, but surprisingly, the opposite is often true. Having a higher credit limit but not using the credit is a straightforward way to improve your score, since it actually improves your debt-to-credit ratio. From this standpoint, it could even be useful to have several accounts that are just there to help raise your credit limit, even if you don’t often use them. However, you’ll still want to be wary of opening too many accounts at once or having more credit than you think you can responsibly manage.
6. Your Number of Credit Inquiries
While it might seem innocuous to agree to multiple hard checks on your credit when submitting different types of applications, too many recent credit inquiries can make lenders think that you’re having a hard time managing your credit, which can end up harming your score. Every hard check, such as when you apply for a mortgage loan, for instance, is placed on your report. The inquiries altogether account for 10% of your credit score, so while a single inquiry shouldn’t hurt, multiple in a short time frame can cost you precious points. On the bright side, only inquiries from the past year are counted on your report, and after 24 months, they no longer show up. Additionally, soft checks, such as checking your own report, don’t have any effect on your score.
These days, having a good credit score is more important than ever before. Your score can have a vast influence on your financial life, affecting everything from mortgage rates to credit card approvals to job offers and more. While figuring out how your score is calculated and what you can do to raise it might seem complicated at first, it’s actually more straightforward than you might have thought. Keep these core factors in mind as you work towards improving your score and you can look forward to a lifetime of better financial health.