Good credit scores can open a lot of doors. It can lead you to getting the best interests for auto, house, and personal loans, influencing the amount you pay for life insurance, getting good deals for real estate, and even being approved for better telecommunications deals. With all these benefits in mind, it is important to know all the factors that influence your credit score to start enjoying these benefits as soon as possible.
Important Credit Score Factors
FICO is one of the largest firms that keep track of a person’s credit history. Almost 90% of all lending decisions in the use U.S. make us of the FICO score. They use a standard metric of 300 – 850 for a credit score, with 300 being the lowest and 850 being the highest possible credit score.
There are five components that make up the FICO score and have different weights. These are: payment history, credit utilization, length of credit history, new credit, and credit mix. While each of these five components have different weights and have different impacts (some having effects on the credit score than others), they all contribute to having a good credit score and should be given equal importance.
Payment History
Payment history comprises 35% of your FICO score and is probably the most important factor in calculating credit scores. Lenders tend to look at your payment history to get a reading on how you handle debts and how reliable you are with payments. Your past long-term behavior is used to forecast your future long-term behavior.
Pay your bills on time. While past problems are not easily fixed, it is important to correct these problems and continue staying current as these problems will go away after some time. As time passes, good payment patterns will show up on your credit report. Although these won’t raise your credit score overnight, it is still a good step towards increasing your credit score.
Credit Utilization
Credit utilization makes up 30% of your credit score. It is the amount of available credit that is regularly used. People who tend to max out their credit cards regularly tend to receive low credit scores as these people are seen as unable to handle debt responsibly.
FICO advises that balances on credit cards and other revolving credit should always be kept to a minimum to keep credit utilization low. While there is no benchmark to how much of the available credit should be used, it is important to keep the balances on your credit card to a minimum. It is also important to pay off your debts rather than moving them around from one card to another or simply moving all debt to one card and closing the others. While this may seem logical, it will lead to lower credit scores as having the same amount of debt over fewer accounts increases the credit utilization percentage.
Length of Credit History
Accounting for 15% of the credit score is the length of credit history. Simply put, it is the length of time an account is kept open and the amount of time since the account’s most recent action. This is used to give a picture of a person’s long-term financial behavior.
Longer credit histories mean more information about a person’s financial habits. Therefore it is important to maintain the accounts you already have and to not open too many accounts too rapidly since it lowers the average age of the accounts.
While it is impossible for someone with new credit to have a perfect score, given the relatively high percentages of the first two factors, they can still achieve high credit scores when they pay their bills on-time and keep credit utilization to a minimum.
New Credit
New credit comprises 10% of the credit score. Applying for new credit accounts can increase new credit and credit mix. However, it is recommended to only open new accounts as needed. Opening too many accounts in short amount of time could be an indication of financial problems and a need for greater credit access.
Credit Mix
Credit mix also makes up 10% of your credit score. In order to have a high credit mix, it is actually encouraged to use your credit card in a variety of ways, but do it responsibly. Generally speaking, having a variety of loans and credit that have been paid off regularly and in a timely manner represents a lower financial risk than those that have no credit at all.