People always stress the importance of having good credit, but it’s difficult to have good credit if you don’t even know how credit is measured. Here we’re going to break down the components of a credit score. With this information, you’ll be fully prepared to work your way towards excellent credit.
The bulk of your credit score – 35% – is determined by your payment history. By taking your payments made, overdue payments, balance on overdue accounts, and number of unpaid items your payment history is determined. This is an important factor, as future creditors want to know you will pay back borrowed money in a timely manner.
This next category makes up 30% of your credit score. Amounts owed is determined by how many accounts hold balances, your total balance across all cards, and your credit utilization ratio. This ratio is the balance vs the credit limit. If you’re spending most of your credit limit, you will have a low score in this category, which is why we often stress the importance of keeping balances low.
Length of Credit History
This is a simple category – and unfortunately it only accounts for 15% of your score. The length of your credit history is determined by the age of your oldest and newest accounts and the average age of all your accounts. They also factor in how long it’s been since you’ve used each account.
New Credit Applications
Opening new accounts can impact your credit – the application itself can even remain on your credit for two years. Luckily this is only 10% of your credit score, and positive gains in the other categories typically outweigh a single opening. However, be sure to avoid rapid fire applications and account openings.
The final 10% of your credit score is determined by credit mix. It’s best to have a diverse mix of credit, between revolving and installment accounts. Revolving accounts are credit cards, retail and gas cards. Meanwhile, installment accounts include student loans, car loans, and mortgages. Again, this is a small portion of your credit score, so it’s possible to have a high score with timely payments as the age of your credit increases.
Click here to learn more about the credit score system, and click here to learn more about maintaining your financial health.