Today, there’s little you can do without considering your credit score first. While a solid credit score is required for things like mortgages and credit cards, you also need to have good credit to be able to rent an apartment or to finance a car.
You know how important your credit score is, but do you know what goes into credit score calculation? The factors that determine your credit score are important for helping to strengthen or maintain your credit score.
Understanding how your credit score is calculated can help you make financial decisions that boost your score instead of sending it spiralling out of control. Read on to learn more.
The first determining factor to your credit score is what your record of paying off debt is. Not only the debt you currently have but past debt as well. You need to have an impeccable history of paying back your debt if you want your credit score to go up.
You need to understand that even one missed payment in your past has the ability to negatively impact your score. Your creditor needs some sort of assurance that you will pay your debt. One failed payment gives them an idea that you may abscond with the credit they lend you.
Mathematically, your payment history accounts for 35% of your FICO score, the most used credit score by lenders today.
Another 30% of your FICO Score is determined by your credit utilization. Credit utilization is the divided total credit revolving around the credit in use.
In simple terms, it is the amount of credit used on a credit product versus the unused amount. Your credit utilization determines how reliable you are with the credit you’re being extended by the current lenders you’re using.
You need to ensure that you are using your available credit prudently. And not just about you borrow, but how you’re managing that debt at the moment. This can be detrimental if you have a number of credit avenues and you fail to keep up with them.
Credit History Length
The longer you have maintained your credit the better for your credit score. For example, if you have held on to a certain credit card for many years, even decades, it plays a positive role in your score.
It is generally assumed that if you are poor with managing your credit, you won’t hold onto a good credit score for long. Your FICO® Score is calculated by the average age of your active credit accounts. It includes how long you have held your old and your new credit accounts.
Your credit history length accounts for around 15% of your credit score according to FICO Score.
The other determining factor in your credit score is your new credit. The more new credit accounts you open, the more likely your score is to go down. For example, if you open an account this week and another next week, creditors consider you a risk.
In essence, it shows that you can be stretched by the other creditors and fail to pay many if not all of your creditors. New credit accounts for around 10% of your FICO Score. Avoid opening many credit accounts if you still are in debt.
The last factor is what type of credit you are carrying around like car loans, student loans, or credit cards among other credits. That is what is referred to as credit mix and this usually happens to people with high credit scores as they borrow from all avenues.
If you manage these debts well, you will have a 10% increase in your FICO Score. If not, that accounts for a loss of the same percentage in your credit score.
Each one of these credit score factors play an important role in your credit score. These factors should all be considered when you are looking at your spending and borrowing habits and how you manage your credit products currently and in the future.