Credit Score Factors
Credit scores can be confusing and frustrating to even the most financially responsible individuals out there. The formulas used to calculate credit scores are murky and misleading, so building your credit score can be a pain if you aren’t quite sure what to do. Read on to find out some of the most important factors that can raise or lower your credit score!
The most important factor affecting your credit score is your payment history. This is why it is so important that you make at least the minimum payment on your monthly credit card bill. Ideally, you should be paying your credit card down in full in order to avoid paying sky-high interest rates on your remaining balance, but making the minimum payment will protect your credit score from falling. You should be aiming to pay your credit card bill and loan payments on time, every time with no exceptions; in fact, you could start seeing a decrease in your credit score even if your on-time payment rate just drops below 99%.
Credit utilization is another factor that has a high impact on your credit score. This one can be tricky; you have all of this credit at your disposal, so why not use it, right? In reality, lenders want to see that you have credit available to you, but you don’t need all of it. If you’re constantly maxing out your credit cards, potential lenders might get worried that you’re not financially responsible, even if you’ve been making your payments on time. Your credit utilization ratio is calculated by dividing the amount of credit you’re currently using by the total amount of credit you have available. For example, if you have two credit cards, each with a credit limit of $500, your total available credit is $1000. If you’ve only used your credit cards to make $100 worth of purchases, then your credit utilization ratio is $100 / $1000, or 10%. Keep your credit utilization ratio under 30% in order to avoid lowering your credit score. Luckily, a high credit utilization ratio is easy to fix. If you maxed out your credit card last month, pay it off in full and try to keep the ratio under 30% this month. As long as you can do that, your credit score will increase and won’t be held against you for years to come like some of the other factors.
Age of Credit
Lenders want to see that you are a consistent, reliable borrower who has been using credit responsibly for a long time. The older your credit lines are, the more it will help your credit score. Newer credit will hurt your credit score, although it is a less potent factor. Age of credit is typically calculated as an average. So, if you currently have only one credit card that you’ve had for six years and you get a brand-new credit card, the age of your credit will drop to three years. Unfortunately, this factor isn’t one you can easily perfect just by making good decisions; you are eventually going to have to take on new credit, and the mere existence of this new credit will slightly damage your credit score. Try to let this factor smooth itself out over time while you work on the other factors that can still get you an excellent score.
When a lender considers extending credit to you, they will conduct a hard inquiry on you. This means that they contact credit rating agencies to obtain your credit score and history in order to evaluate your worthiness as a borrower. Unfortunately, these hard inquiries do slightly hurt your credit score. Hard inquiries are very normal because, again, you are eventually going to have to take on some new credit, and hard inquiries are an unavoidable part of the deal. Too many hard inquiries, however, will be a red flag for potential lenders. If you’re trying to take on a whole lot of new credit at once, lenders might think that you’re planning on running up your credit cards and skipping town. The good news is that the credit score drop from hard inquiries goes away after a couple of years! So In order to protect your credit score while still having access to an appropriate level of credit that matches your needs, try to only take on more credit every few years unless you really need it.
In the same way that lenders like to see that you’ve been a good credit user for a long time, they also like to see that you’re able to balance multiple accounts of different types. This might mean that you have a couple of credit cards, a mortgage, a car loan, and some other type of loan. This is another factor that will improve with time – don’t rush to open a bunch of new accounts just because you want to improve your credit score! The number of accounts you have open is not a very heavily weighted factor for your score.
While it may naturally take many years for you to get your credit score near perfect, there are certainly things you can start paying attention to right now that can help you get on the right track. If you want to see more tips on what you can do to stay on top of your credit score, check out our article 7 Ways to Raise Your Credit Score!