Have you ever felt like you’d need an advanced degree to understand what’s affecting your credit score? Good news is you don’t—it’s actually simple.
Behind the number itself (credit scores typically range from 300 to 850), there are five main factors used to calculate credit scores. Lenders use these scores to figure out how likely it is that you will pay back your debt, so they are often the deciding factor in whether or not you will get a new loan.
As your financial profile changes, so does your score, so knowing what factors affect your credit score gives you the opportunity to improve it over time.
Let’s take a closer look at the factors that make up your FICO credit score and how the model calculates your score.
1. Payment history
The most important part of your credit score is your payment history, and even one missed payment can hurt your score. When you apply for new credit, lenders want to know that you will pay back your debts on time. Your history of making payments makes up 35% of your FICO score, which is the credit score that 90% of the top lenders use.
2. Credit Utilization
The next most important part of your credit score is how you use your credit, as shown by your credit utilization ratio. To figure out your credit utilization ratio, divide the total amount of revolving credit you are using by the total amount of revolving credit limits you have. This ratio looks at how much of your available credit you’re utilizing and can give a snapshot of how reliant you are on non-cash funds. Using more than 30% of your available credit is a negative to creditors. Credit utilization accounts for 30% of your FICO score.
3. Length of credit history
15% of your FICO score is based on how long you’ve had credit accounts. This includes the age of your oldest credit account, the age of your newest credit account and the average age of all your accounts. Generally, the longer your credit history, the higher your credit scores.
4. New credit
10% of your FICO score is based on how many new credit accounts you’ve opened recently and how many hard inquiries lenders do when you apply for credit. Too many accounts or inquiries can show that you are taking on more risk, which can hurt your credit score.
5. Credit Mix
People with good credit scores usually have a variety of credit accounts, like a car loan, a credit card, a student loan, a mortgage, or something else. Credit scoring models look at the types of accounts you have and how many of each you have to see how well you handle a wide range of credit products. Your mix of credit makes up 10% of your FICO score.
To learn more about credit scores and managing credit, schedule a FREE consultation call and we’ll help you boost your credit score in no time!