Credit scores have become increasingly important to consumers and can have an enormous impact on loan terms, mortgage payments, credit card accounts, apartment applications and employment prospects. They are determined based on information found within your credit report and may differ depending on which scoring model is employed.
Some of the key indicators include your payment history (35%), credit utilization (15%) and length of credit history (10%).
Payment History
Missed payments on credit cards or loans can have an enormous negative effect on your score. Late payments and your utilization ratio (how much you're borrowing relative to how much credit is available) are two main contributors that contribute directly to this rating factor.
lenders use your credit report to assess whether or not they believe you will pay back what you owe promptly, which is why your payment history is such a crucial component in determining your scores and it's so essential that payments are made on time - this may take time, but paying on time is one of the best ways you can build them over time. Your payment history includes accounts such as credit cards, installment loans such as student loans and mortgage loans as well as retail financing agreements that lenders prefer seeing diverse accounts when scoring you.
Credit Utilization
Credit utilization is one of the cornerstones of your credit score. It measures how much debt you owe in relation to each revolving account such as credit cards; lenders use this metric as an indication of whether you will be able to handle more credit responsibly and repay loans on time.
Financial experts generally suggest keeping your credit utilization below 30%; however, some now recommend maintaining it at 10% or less.
If your current credit limits don't allow for reaching your ideal utilization ratio, consider increasing them. Credit bureaus use account balance reports from card issuers to calculate credit utilization ratios; higher limits equate to reduced ratios.
Length of Credit History
Length of Credit History Contributes 15% to Your ScoreScoring models consider your entire credit history when calculating your score; this includes how many credit cards, installment loans (such as mortgages and auto loans) and revolving credit card accounts you hold as well as their age and extent of usage within their calculations.
Credit utilization accounts for 30% of your score. Lenders want to see evidence that you can responsibly manage your debt over time, which includes missed payments, collections or bankruptcies as negative factors that could lower it significantly. How long it has been since you missed a payment and the frequency with which payments have been missed also play a part.
New Credit
Lenders and creditors take great interest in credit scores because they determine whether you qualify for loans or credit cards at certain interest rates or terms, rent/mortgage payments you can afford, utility costs etc.
Your credit score depends heavily on two components: payment history and utilization - or how much debt you owe relative to available credit. Keep balances low, make payments on time and in full each month, and consider keeping any old accounts open (except those that charge annual fees ) since length of history factors positively into your score.
Limiting new credit applications can also help, since each inquiry into your report degrades your score slightly. It's best to avoid making multiple hard inquiries at once unless it is necessary - for instance when shopping for cars or mortgages.
