Your credit score has a significant impact on your life. It affects whether you can get a car loan, buy a house or qualify for an apartment. It determines how much interest you pay on credit cards and loans and how much you’ll pay for car insurance. If you have a low credit score, you may not qualify for credit cards or loans at all.
The following five factors determine your credit score. By knowing all five factors, you can build a solid credit score.
1. Your Payment History
As your payment history accounts for 35% of your credit score, making sure everything is paid on time is critical. Missed payments, collections, foreclosures, bankruptcy, and charge-offs will seriously impact your credit score. Lenders want to know that you’ll pay back any credit they extend you. With a poor payment history and low credit score, it’s unlikely you’ll qualify for any credit card or loan.
2. How Much You Owe
How much money you owe is 30% of your credit score. Your total debt matters, as does your credit utilization. Credit utilization is how much credit you’re using as a percentage of how much credit you have available. You should keep the credit utilization on your credit cards below 30%. It’s even more beneficial to keep it below 10%. However, keep it above 0%, as lenders want to see that you’re actively using credit.
Credit card companies report to the credit bureaus when they issue you a statement. They report the statement balance, whether the last payment was made on time, and your credit limit. If you make a significant purchase that pushes your credit utilization above 30%, you should pay before the statement generates. By doing this, you can keep your credit utilization below the magic number.
3. Credit Card Mix and Use
Having a revolving line of credit plays a vital role in your credit score. Lenders want to see you can responsibly use different lines of credit. This includes credit cards along with mortgages, car loans, student loans, and so on. The mix of credit available to you is 10% of your credit score.
How often you use credit matters. Some people avoid having a credit card with the thinking that it will improve their credit score. They are wrong, as lenders want to see responsible use of revolving lines of credit. You should use a credit card and pay it in full every month to improve your credit score.
4. The Age of Your Credit History
The length of your credit history is 15% of your credit score. The history includes how long you’ve had your longest credit account and the average age of all the accounts you have. The longer your credit history, the better your credit score will be, as it shows you have experience handling credit.
Opening new credit accounts can temporarily lower your credit score. So can closing accounts, especially if it’s one of your oldest ones. It’s for this reason that you shouldn’t cancel old credit cards you’re no longer using. You also shouldn’t open several lines of new credit at once.
5. Number of Credit Inquiries
The number of recent credit inquiries makes up 10% of your credit score. Every time you apply for a credit card or loan, the lender will order a report from the credit bureaus. Just a couple of recent inquiries won’t have too much of a negative impact on your credit score. However, several inquiries in a short time will.
Credit inquiries factor into your credit score for 12 months. They drop entirely off your credit reports after 24 months. Only hard inquiries count, which happens when a lender asks for a copy of your credit report. Soft inquiries, such as when you check your credit reports, don’t affect your credit score.