What Goes Into a Credit Score?
A credit score is something that is used by lenders when you want to borrow money, for example when applying for a credit card or a loan. Everyone’s credit score is unique. Various things can affect your credit score. Here are a few things that can influence your credit score and what they mean.
On-Time Payments
On-time payments make up a large portion of your credit score - around 35%. This portion is influenced by your payment history and shows lenders that you will be paying them back and on time. It is important to pay all bills on time as late payments can dent your credit score. Something that can help with making sure bills get paid on time is to set up autopay or calendar reminders so you do not miss important payment dates.
Capacity Used
The second largest portion of your credit score is the capacity used or the amount of your credit that you use. It is recommended that you stay within 30% of your available credit as using more than 30% of your available credit can be negatively viewed by lenders. To keep this percentage low you can set balance alerts or make smaller payments throughout the month. Something I do is immediately pay my credit card after making purchases which can help with not only making payments on time but also keeping the capacity used percentage low.
Length of History
Length of history is the length of your credit history - this is around 15% of your credit score. This is calculated by looking at the age of your oldest and youngest account as well as the average age of all accounts. Longer credit history is better, thus it is recommended to keep old accounts open unless there is a reason to close them, like an annual fee on an account you don’t use anymore. Another way to help this section of your credit score is to become an authorized user on an old account, it could be your parent's account, with good payment history.
Types of Credit
Types of credit refer to the different types of credit you may have and make up for around 10% of your credit score. These can include student loans, car loans, mortgages, credit cards, etc. This section takes into account the different accounts you have and how well you manage them. You do not need to make one of each type of account!
New Credit
While it may be tempting to apply to various credit cards it is important to remember that each application causes a “hard inquiry” which can reduce your credit score. The category “New Credit” refers to the number of new accounts as well as the number of accounts you have applied to recently and makes up around 10% of your credit score. Opening several accounts in a short amount of time can be seen as an increased risk and can be negatively seen by lenders.
Remember, that everyone’s credit score is unique so be sure to monitor your credit account by checking in often.