Your credit score is something that follows you just about everywhere you go and is one of the key factors that creditors use to determine whether you will be approved for a loan. The higher your score, the better loan terms you also typically receive. Utility companies even refer to this important background information to determine whether they will provide services to you or not.
Because your credit score is so important, it’s very important to understand the five major components that typically make up your credit score. The FICO system is one of the most recognized methods of calculating a person’s credit score, and the factors it considers is as follows:
Payment History – Reported payments account for 35 percent of your total credit score. Keep in mind that late payments will affect your score negatively, so it is important to consistently make payments on time.
Credit Utilization – How much of your credit is in use makes up 30 percent of your score. If you reach the credit limit on your credit cards, it lowers your credit score. Do your best to pay down credit card balances and keep them low.
Length of Credit History – How long you have been using credit and making payments, as well as the amount of time each of your credit accounts have been open, accounts for 15 percent of your total credit score. If you are trying to raise your credit score, closing accounts may not necessarily be the best move. Every person’s situation is different, but it might be better to pay off your accounts and keep them open to maintain long-standing accounts.
New Credit – New credit accounts make up 10 percent of your credit score. Opening too many new accounts in a relatively short period of time could hurt your score.
Credit Mix – The remaining 10 percent of your score is based on the variety of credit accounts you have. Having a mix of revolving credit accounts such as credit cards and installment loans with positive payment histories shows that you can manage different types of credit and will increase your score. Since your credit score is so important, it is important that you know what it is so you can take steps to improve it if needed. Annualcreditreport.com is a website you can go to and get a free credit report every 12 months from Equifax, Experian, and TransUnion, which are national reporting agencies.
Remember, the higher your credit score, the lower the risk to a potential lender, and the better terms for you.