Typically, scores above 700 are considered good; scores above 800 are considered excellent. Scores below 640 are usually considered in the ‘needs improvement’ range, and can prevent borrowers from getting better rates.
In this article we discuss the “Big 5” factors influencing your score and four ways to improve your credit.
“Big 5” Factors Influencing Your Credit Score:
1. Payment
History – 35%: The biggest concern lenders have when making a loan is whether
they will get their money back, so your payment history has the greatest impact
on your credit score. Things that can detract from your payment history are
making late payments — and how late those payments were, if any of your
accounts required a collections agency to capture missed payments, if you have
any debt settlements, bankruptcies, etc., as well as how recent the last
negative event took place and how frequent missed payments occur. Note that
your payment history goes back seven years; anything older than that is wiped
clean.
2. Amounts Owed – 30%: Making your payments on time is great –
as long as you’re not overwhelmed by the amount you owe. Having a $0 balance on
your accounts is certainly not necessary, as owing a little bit shows lenders
that you are responsible and making your payments on time.
3. Length of Credit History – 15%: A longer credit history can be
helpful, as long as it’s not marked by missed payments – but if you’re new to
having credit, that’s okay too as long as you are making payments on time and
don’t have a huge amount of debt. One tip some finance experts offer is to
leave credit card accounts open, even if you don’t use them anymore, because
having a long-standing credit account in good standing will help boost your
score.
4. Types of Credit – 10%: It’s also beneficial to have a mix of
different types of credit that you manage responsibly – like student loans,
auto loans, credit cards, and even a rental tradeline. Having a diverse credit
profile is better for your credit score because it indicates you have
experience managing various types of credit.
5. New Credit – 10%: Each time you submit an application that requires a credit check, an inquiry is placed on your credit report showing that you’ve made a credit-based application. One or two inquiries won’t hurt much, but several inquiries, known as “credit shopping”, especially within a short period of time can cost you many points off of your FICO score. Keep your applications to a minimum to preserve your credit score. The good news is that only those inquiries made within the last 12 months factor into your credit score. Inquiries completely disappear from your credit report after 24 months. Note that checking your own credit report results in a “soft” inquiry, which does not affect your credit score.
Four Ways to Improve Your Credit Score
If you want to improve your score, it’s important to consistently demonstrate responsible financial behavior by doing a few things like always paying your bills on time and not having too much debt. Below are four ways to improve your credit score — and maintain a good score once you’ve gotten it where you want it:
1. Pay Every
Bill On Time – Your payment history is one of the top factors when calculating
your score. Set up auto pay and reminders so that you pay each bill on time
every month.
2. Don’t Close Accounts with Good Histories – Closing an account
isn’t always best for your credit score – particularly accounts with good
histories. When you close an account it’s usually removed from your credit report,
and that means you lose the credit history with that account.
3. Keep Your Credit Utilization Below 30% – Your credit score may
take a hit if your monthly statement balance is over 30% of your limit, even if
you pay off your balance each month. Why? Because most likely, your statement
balance has been reported to the credit bureaus and they like to see balances
of less than 30% of the limit.
4. Apply for Credit Only When Necessary – While having a mix of credit lines is good for your score, remember, if you apply for multiple lines of new credit, your score can take a hit.
