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The credit score is the most important yet misunderstood number in our financial lives. There are more ways to hurt your credit score than we can count, but only a few things you can do that will help improve it. Luckily, with some direction, once you understand what factors of your score you need to improve, you have somewhere to start. Here are five different factors that make a difference in your overall credit score.
1. Payment History
One of the most impactful factors that effects your score is paying your bills on time. FICO credit scores, used by 90 percent of top lenders for credit decisions, base 35 percent of your score on payment history alone. On-time payments are hands down one of the best ways to improve credit scores, especially if you have a long history of doing so.
But now, serious payment issues such as tax liens, collections, and bankruptcy can cause massive damage to your credit score and might get you a one-way ticket to no approval for anything that requires good credit. Even if you have improved your score, having a bad history here will hold you back.
2. Amount of Debt
“Everytime you borrow money. You are robbing your future self”
-Nathan Morris
Now, let’s be honest, almost everyone has borrowed money at some point. Either to pay bills, to buy a car or home, or to invest in a business. In short, we are in debt, and we are required to pay it back.
The worst part is that our society promotes bad financial habits, which make our debt continue to grow. I’m not saying that all debt is bad. However, moderation is the key. Without it, your credit score falls drastically. According to FICO your debt level determines 30% of your credit score. Therefore, as a guideline, you should keep your credit card utilization at 30% or less, meaning only charge up to 30% of any card’s available limit.
3. Age of Credit
Your credit score also takes into account how long you have been using credit. Having a long credit history helps you get a good credit score. This is why you should always think twice before closing old accounts. The average age of credit is 15% of your credit score.
This applies to all three types of credit. Installment loans close once they’re paid in full, but if you’ve had a credit or charge card for some time, it can help your credit score by keeping it open, even if you don’t use the card very often. Closing it could lower the length of your credit history, which could negatively affect your credit score.
4. New Credit
When you apply for a new line of credit, like a credit card or loan, lenders will do a hard inquiry or pull. It means that a creditor has requested to look at your credit file/report to determine how much risk you pose as a borrower. Hard inquiries show up on your credit report and can affect your credit score negatively if there are “too many” of them. Luckily, they only stay on your report for 2 years, instead of the average 7 years that most other items do.
Also, keep in mind that your account age average will be affected if you create new accounts. New credit only accounts for 10% of your credit score, but lenders like to see how much new credit you’re taking on, as too much too soon could be an indicator you’re not doing well financially. This concept applies to all types of credit, so you may want to space them out so you don’t have too much new credit too soon.
5. Credit Mix
Credit mix makes up the last 10% of your score. Having a diverse mix of credit accounts can be a good thing, as long as it is handled responsibly. Having no credit cards or history is viewed as a higher risk than managing many credit types responsibly. So, in order to have a good credit score, or improve your current score, you have to have something showing positively on your credit.
Like any mess, there are more ways to create one than there are to clean one, and it always takes more time to correct than it does to mess it up. That means you have to be intentional with your finances, and be mindful of the factors at work. Only then will you see the progress you’re looking for.