Your credit score is a three-digit number that conveys if you responsibly manage your debt obligations. Lenders look at this number to determine if you qualify for a loan and how much capital you can receive. The FICO scoring model used by 90 percent of lenders and creditors ranges from 300 to 850 – the higher, the better. A good FICO score can help you get lower interest rates and better loan terms. Lenders have different credit score requirements for each of their financial products. Some lenders offer flexible solutions for borrowers with lower credit scores, but this arrangement also results in higher interest rates.
It’s important to have a good credit score so you get a better interest rate on your loan, but you may be wondering what influences credit scoring models. Your score is made up of five distinct components – payment history, amounts owed/credit utilization, length of credit history, credit mix and types, and new credit. Understanding how each of these credit score factors works can help you raise your score faster and keep it at a good level.
Main Factors That Affect Your Credit Score
Payment History
Payment history is the most important component of your credit score. It makes up 35% of your score, more than any other credit score factor. Making on-time payments will improve your score and also help with other key credit score factors. However, late payments will hurt your credit score because those late payments warn lenders that they may not receive every loan payment on time. The good news is that you can rebuild credit if you get on top of your payments. However, too many late payments will make a lender more cautious, and it will result in a higher interest rate on new accounts. Therefore, it’s vital that you pay your outstanding debts and bills on time to prevent any delinquencies from appearing on your credit report.
Amount Owed/Credit Utilization
Your credit utilization ratio is the second largest credit scoring factor. It accounts for 30 percent of your credit score and measures how much of your credit limit is currently in use. For example, if you have a credit card with a $1,000 limit and owe $450, your credit utilization comes out at 45 percent. Borrowers should strive for a credit utilization ratio below 30 percent to improve their credit scores, but it’s optimal to get this number below 10 percent. Every credit card payment will reduce your credit utilization ratio and put you in better standing. It is a good idea to make more than the minimum payment on your credit card to avoid high debt and improve this critical component of your credit score.
Length Of Credit History
Financial institutions will reward a consumer who has a longer credit history. A lengthier credit history demonstrates more experience with managing debt and paying back loans and lines of credit. If you have a brief credit history, it could take some time for your score to reach an optimal credit score. However, consumers with extensive credit histories and accounts in good standing generally have stronger credit scores. There’s more to your FICO score than experience. Credit age accounts for about 15 percent of your credit score. It will prop up your score if you have a lengthy credit history, but people getting started can compensate with a good payment history and low credit utilization.
Credit Mix And Types
Do you have a healthy mix of installment (i.e., personal loans, student loans, mortgage loans, car loans) and revolving (i.e., credit) accounts? Credit mix makes up 10 percent of your credit score. Lenders and creditors want to know that you can responsibly manage both types of credit. You shouldn’t add debt just for the sake of it because falling behind on payments will offset the effect of a good credit mix. Borrowers can take out lines of credit for this purpose and not draw against them if they don’t need the cash. You could take out a line of credit and never pay interest, but you can’t say the same thing about an installment loan.
New Credit
Each time you apply for a debt product, a hard inquiry is generated and could drop your score by a few points. A hard credit check isn’t enough to take down your score, but incurring several of them in a short time frame can have a more meaningful impact. While hard credit checks will hurt your score, soft credit inquiries have no impact on your credit score. Soft checks are fine.
Other Things That May Affect Your Credit Score
Reporting Errors
The credit bureaus aren’t perfect, and it’s possible that your report has an error on it. However, you can file prompt disputes to have the incorrect negative information affecting your credit score removed.
Missing Payments
Depending on your credit rating, a missed payment could tank your credit score by up to 100 points. However, they are only reported once an account is delinquent for 30 or more days, and the negative impact will dwindle over time.
Using Too Much Credit
If you repeatedly swipe credit cards without paying them down or off each month, your credit score could take a hit. So only spend as much as you can pay back and avoid living above your means.
Delinquent Child Support
Have you fallen behind on child support payments? It can be reported to the credit bureaus as a negative item and hurt your credit score.
Paying Off a Loan
Your credit score could fall when you pay off a loan due to a change in your credit mix. Fortunately, the impact is usually only temporary.
Closing A Credit Card
Closing credit card accounts will hurt the length of your credit history, which means your score could decrease. It only makes sense to close a credit card if there’s a high annual fee and you aren’t taking out a big loan or applying for a refinance anytime soon.
Bank Overdrafts
Do you have overdraft protection for your checking account tied to a line of credit? If you accumulate a balance and fail to make timely payments, the delinquent line of credit may also be reported to the credit reporting agencies and hurt your score.
Getting A Credit Limit Increase
Assuming you refrain from using the credit card, a credit limit increase could lower your credit utilization rate and raise your score.
Things That Don’t Affect Your Credit Score
The following have no bearing on your credit score:
- Marital Status
- Age
- Race, Color, Religion, Ethnicity
- Occupation, Salary, Employment History, And Employer
- Where You Live
Ways To Improve Your Credit Score
Get A Credit Builder Loan
Credit builder loans offer consumers the best of both worlds. You can improve your credit score while saving money, and a hefty security deposit isn’t required. Here’s how they work:
- Get approved for a credit builder loan. The bank or credit union will deposit the loan proceeds into a savings account.
- Make monthly payments for the specified loan term.
- Receive the loan proceeds when the balance is paid in full.
Pay Your Bills On Time
Be sure to make timely payments on your outstanding debt obligations and bills each month. Reviewing your monthly income and expenses can help you budget accordingly so you don’t overspend. In addition, you can look at past bank accounts and credit card statements to assess how you spend your money. If you haven’t tracked your expenses before, you will have more opportunities to trim your monthly bill. Even if you fall behind, it may not be too late. Lenders and creditors won’t report an account until it reaches 30 or more days past due.
Minimize Your Debt
To give yourself the best chance at a good or excellent credit score, keep your credit utilization as low as possible. Lenders and creditors prefer to see this figure at or below 30 percent. Making more than the minimum payment and not incurring too much debt will help you stay on top of your credit utilization ratio. Some consumers take out loans with longer durations to minimize monthly payments and make them more manageable in the process.
Dispute Mistakes/Errors
Your credit report may contain errors and outdated information, dragging your score down. So be sure to review it regularly and file disputes if necessary.
Limit New Credit Requests
Several applications for new credit can also mean bad news for your credit score. If possible, limit any further requests for credit to avoid dinging your credit score while you work to improve it.
Get Help from a Credit Expert
The Credit Pros provides AI-assisted credit-related services, easy-to-read credit reports, personalized score insights, credit builder loans, credit reports and scores from three bureaus, credit monitoring and alerts, and consultations with certified credit specialists. They have been rated A+ by the BBB and offer a 100% 90-day money-back guarantee, so you’re assured that you’re getting the best possible service for your needs.
The Credit Pros offers three affordable pricing options with no long-term contracts at varying monthly fees of $69 to $149 (with a first work fee), catering to different financial situations. They are committed to getting you effective results to improve your credit score fast. To obtain further information about The Credit Pros and avail of their free consultation with no obligation to sign up, fill out a short form or call (727) 306-8201 to connect with a credit specialist.
