If you’re just learning to manage your finances, you must know what credit score is and why it should be managed. Credit score is a parameter used by lenders to determine whether you’re eligible for a credit card or loan, and it also determines the interest charged on these financial tools. Several things can influence your score both positively and negatively, so let’s look at a few common factors that affect credit score:
- Payment history
This is the most important component of your financial portfolio and has a 35% contribution to your credit score. To achieve a good credit score, you must ensure that all your debts are paid on time. In the case of late payments, how late the payments are made also makes a difference in how severely it affects your credit score. To prevent this, you can approach creditors to get the due dates moved so that you can make timely payments.
- Credit utilization
Credit utilization, one of the common factors that affect your credit score, is the amount of credit you currently owe, either to a lender or credit card company. It contributes 30% to your FICO score, and it is recommended that your credit utilization be no more than 30% of your total available credit.
- Length of credit history
This is the duration for which you have had a credit account or the age of your oldest credit account. If you keep your credits unpaid for long, it will result in the consecutive lowering of your credit score. Credit history contributes to about 15% of your overall credit score. Remember, the higher your credit history, the better will be your credit score.
- Credit mix
This describes the variety of credit accounts that you currently have. A person with a diverse credit portfolio that contains components like car loans, home loans, credit cards, and more will have a higher credit score, provided they pay their installments and bills on time. This factor has a 10% contribution to your overall credit score.
- New credit
How many credit accounts you have recently opened or applied for contributes to around 10% of your credit score. If you have recently acquired multiple loans in a short period, it may reflect poorly on your credit portfolio and deem you an unreliable borrower. Applying for multiple credit accounts also initiates hard inquiries into your credit history, which can harm your score.
The importance of each of these common factors that affect your credit score directly relates to the percentage by which it contributes to your score. You can take steps to build your credit by making timely payments and utilizing your card wisely. If you’re just starting off, you can also ask a trusted friend or family member to add you as an authorized user on their account to increase your credit history length and reliability.