Whether you’re starting a business or buying a house, good credit can be a game-changer. Your credit score can make or break job opportunities, housing, and getting a new car.
The key to maintaining good credit is tracking what most influences your credit score. Take a look at this breakdown of the most important credit score factors.
What Most Influences Your Credit Score?
A credit score is a number between 350 and 850 that helps lenders understand your financial habits. The higher the score, the more likely you’ll repay debts.
While there’s nothing perfect about the credit scoring system, it’s a helpful tool for lenders, landlords and employers who don’t have another way of judging whether or not to trust a borrower. You can use the scoring system to your advantage to maintain a high score and get access to the best deals.
Here are the top factors that influence your FICO score.
On-Time Payments
Making on-time payments is the number one way to improve your credit score. On-time payments account for 35 percent of your credit score.
Most creditors report to the three major credit bureaus, Experian, Equifax and Transunion, every 30 days.
When you make your payment on time each month, your credit report reflects this information. Late payments can ruin a credit score if they’re left unpaid beyond 30 days.
Most creditors offer a grace period, but if you don’t contact them to make arrangements and simply don’t pay your bill for a month it will get reported. Talk to your creditors as soon as your payments become unaffordable.
Many lenders have programs set up to help borrowers remain current on their account. Keep in mind that these programs aren’t required and that the late payment can still be reported at the lender’s discretion.
If it is, you have the right to add a note to your credit report regarding the late payment. This is helpful in the future for lenders who see the late payment and want to know why you fell behind.
The more accounts you pay on time each month the higher your credit score increases over time. Unfortunately, not all bill collectors report to the credit bureaus.
Utilities like public water and electricity don’t report your on-time payments. If you’re specifically opening a credit account to boost your credit history, ask the creditor whether the payments will be reported before submitting an application.
Amount of Credit Used
The second major impact on your credit comes from the amount of credit you use. If a credit card company offers you a credit card with a limit of $1,000 and you use $900 this causes your score to drop.
The amount of credit used is called your credit utilization ratio. Experts agree that keeping your balances below 30 percent is the best way to boost your credit score.
This means never carrying a balance of more than $300 on a card with a $1,000 limit. Notice the recommendation only applies to when you carry a balance.
It’s perfectly fine to charge what you need to your credit card as long as you repay the balance in full, or below 30 percent of your total limit, before the due date. Once you carry that balance beyond 30 days, your credit score drops.
Credit utilization accounts for 30 percent of your credit score. If you have multiple accounts open, your credit utilization is taken for each account and the sum of all your accounts.
This means that having multiple credit cards can work to your benefit if one of your card balances is above 30 percent. For example, if you have three credit cards that each have $1,000 limits and one card has a $900 balance you meet the 30 percent requirement if the other two cards have a $0 balance.
Managing the amount owed demonstrates financial responsibility. Show that you can be trusted to have access to large amounts of money but will only use what you need.
Oldest Credit Line
The third biggest factor in determining your credit score is the age of your oldest credit line. This credit score factor rewards those who keep credit accounts open over a long period of time.
Guard against closing unused accounts. Try using the card from time to time for small purchases like a cup of coffee or to cover lunch expenses. Paying off the charges before the due date helps keep your account active and on time.
This is a double benefit because it allows you to add to a positive payment history while keeping accounts open. Most creditors close inactive accounts after a certain period of time.
Check with your lender to find out how often you need to use your account to avoid closure. Length of credit history accounts for 15 percent of your credit score.
Opening New Accounts
Too many new accounts in a short period of time can be harmful to your credit score. Lenders view too many credit inquiries at once as a sign of a potential financial setback.
Borrowing lots of money at once looks like a high risk to most lenders. One exception is while shopping for a mortgage. A variety of lenders can pull your credit reports during this time period without causing your score to drop.
Credit Mix
It’s a good idea to have a variety of credit accounts to help strengthen your credit score. Think of opening a retail card or learn more about auto equity loans to help diversify your accounts.
Since this only accounts for 10 percent of your overall score, it’s not necessary to rush out and open a wide range of accounts. Take your time to find the right mix that makes sense for your financial situation.
What Most Impacts Your Credit Score?
Learning what most influences your credit score can help you take control of your financial future. When you have quick access to low-interest rate loans, you can act fast on the best deals when buying a house or opening a business.
Many people don’t think of their credit scores until they need to make a major purchase, but by then, their habits are already in place. Good credit takes time.
Practicing good financial habits over the long term is the best way to ensure you get the best credit score. For more information and tips, check our blog for updates.