A credit score is the numerical representation of your creditworthiness, and it deeply impacts your interest rates and monthly payments. Whether you’re acquiring a mortgage or an auto loan, your credit score tells lenders how likely you are to make timely payments.
While lenders don’t reveal the exact method they use for evaluating credit scores, there are some universal factors 90% of top lenders consider. According to major scoring companies like Fair Isaac Corporation (FICO) and VantageScore, the following factors impact your credit score:
1. Payment History
Payment history accounts for about 35% and 40% of your FICO and VantageScore credit scores, respectively. Remember that making just one payment after 30 days past its due date can remain on your credit report for about seven years. The consequences are even stricter if you’ve faced bankruptcy or foreclosure.
Set payment reminders on your calendar or set up auto-payments so you never miss a due date. The best part? Making timely payments is one of the best ways to improve credit score over time.
2. Credit Utilization Ratio
This is the percentage of your total available credit that you’re currently using. According to FICO, the credit utilization ratio makes up about 30% of your credit score. A credit utilization ratio under 30% is typically good to go.
The credit utilization ratio is one of the few factors whose effects are easy to reverse. For instance, you can pay off a high-balance credit card, and the lender will immediately report it back to the credit bureaus. The damage will disappear, and a new score will be generated. Reliable lenders like AmeriSave will ensure timely action.
3. Length of Credit History
Next, there is your credit age, also known as the credit depth. Here’s how it is calculated: Scoring companies like FICO and VantageScore calculate the age of your oldest debt, the age of your newest debt, and the average age of all your accounts.
In simple terms, the longer your credit history, the higher your credit score will be. Avoid closing your previous accounts unless there’s a compelling reason to do so.
4. Credit Mix
Credit mix takes up 10% of your FICO Score. Most credit-scoring companies and lenders prefer a mix of debts, such as:
- Student loans
- Mortgage
- Car payments
- Credit cards
5. New Credit
Lastly, the length of time since you’ve applied for a new debt impacts your credit score. It’s pretty straightforward that acquiring new debts can strain your budget and make it difficult to pay off previous ones.
The best thing you can do is space your credit applications strategically. This will keep your credit score nearly unchanged.
Factors that Don’t Impact Your Credit Score
Now that you know what factors impact your credit score, here are some situations you should not worry about:
- Checking your own credit score. The federal law allows you to get your credit score for free once a year from three sources, including Experian, TransUnion, and Equifax.
- Rent and utility bills are not reported back to credit bureaus, which is why they don’t impact your credit score.
- Your age.
- Bank balance.
