Understanding Your Credit Score
The 5 Factors that Make Up Your Credit Score
Your credit score is one of the most important elements in your financial dealings. It provides lenders with a snapshot of your credit history and a summary of the risk involved in lending to you. But beyond simply determining whether you qualify for a loan or not, your credit score can also affect your interest rate and how much a loan will cost you in the long term.
As a result, understanding the factors behind your credit score will help you to optimize and improve your credit, while simultaneously taking steps to avoid any decisions that could lower it.
Here are the five factors that comprise your credit score.
Payment History (35%)
This section analyzes how consistent you are in paying your bills on time. As the largest single contributor to your credit score, it should always be your first priority. Spend within your means and avoid late payments and bankruptcy to grow and maintain a high score.
Amounts Owed (30%)
This represents the number of active credit accounts you own, how much you currently owe, and how much of your available credit you are using. Aim to keep your card balances at 25% or less of their limits, as this indicates a more stable spending pattern.
Length of Credit History (15%)
Building credit takes time, and a longer healthy track record is always better. If you haven’t already begun to build credit, now is an excellent time to start.
Types of Credit in Use (10%)
This category considers your mix of revolving accounts, such as credit cards, and installment accounts, like mortgage loans. If you successfully manage a wide variety of accounts, this score will be higher than that of someone managing one or two. However, adding new accounts will slightly deduct your current score, so consider the tradeoff before making a decision.
Inquiries / New Credit (10%)
As mentioned above, credit inquiries and the opening of new credit accounts will negatively affect your score for about a year or two. It’s typically better to add new accounts gradually, as opening too many too quickly is seen as an indication of financial desperation.
Annual Credit Report
Under federal law, you can get a free credit report from each of the three national credit reporting companies every 12 months. AnnualCreditReport.com is the authorized source of that free report, and you can also purchase your credit score from any of the credit agencies directly.
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