5 factors that affect your Credit Score!
When we think of our credit score, the first thing we commonly think of is credit cards. Yes, credit cards do affect your credit report and credit score, but so do many other lines of credit such as personal loans, student loans, and auto loans.
You can think of your credit score as a trust score; can we (the lending institution), trust you (the borrower), to use this money responsibly and pay us back in a timely manner while adhering to our contract/agreement.
Since the 1950’s, credit cards have taken the world by storm with 24/7 access to credit, reward points, international spending ability, and approval decisions within seconds. Credit cards are the most common way to establish credit history, build credit, and make purchases securely without having to worry about fraud that could drain your entire checking account if you use a debit card. With all this power, does come great responsibility. If you are late on payments, utilize over 30% of your credit limit/exceed your limit, and misuse your credit card to make unnecessary purchase; you will more than likely find yourself in extreme debt, with a very low credit score, and unable to apply for additional credit in the future.
“With all this power, does come great responsibility.”
To give you all a quick lesson on your credit score, I decided to write this quick article giving you the top 5 factors that affect your credit score.
- On-time Payments: As stated earlier, lending institutions want to see if they can trust you as a borrower, thus, checking your credit score. Your payment history affects a whopping 35% of your credit score, which is why this the most important factor to remember. If you are struggling with building credit, the most basic thing you can do today is pay the balance due on time every month. As months and years pass, you can either build good history by paying on time, or bad history by missing payments and being late.
- Credit Utilization: Credit Utilization affects a total of 30% of your score. Think about the amount of credit you currently have access to, whether it’s $1,000 or $20,000. When you use your credit card or other lines of revolving credit, part of your score is determined by the amount you owe and the amount available to you. Most credit experts advise people to stay under 30% utilization, meaning if you have a total $1,000 available to you, then it is best to spend no more than $300. In contrast, I typically recommend clients to use credit as sparingly as possible, possibly on utility bills, or other mandatory living expenses. Moreover, I advise everyone to pay off your credit cards in full each time you use them.
Many other types of loan balances such as your auto, student, and personal can affect this portion of your as well. Depending on if you paid a large portion of the balance down or if you are barely keeping up. For example, if you took out an auto loan in 2013 for $20,000 and in 2018 the balance is $5,000, this shows credit agencies that you are responsible and can pay off loans in a timely manner.
3. Length of Credit History: Establishing an extensive, on-time payment history reveals to creditors your consistency and reliability when it comes to paying your loans. This portion of your credit affects 15% of your score and sort of goes hand-in-hand with payment history.
One of the biggest ways to contribute positively to this part of our credit score is to start building credit as early as possible. After opening your first credit card account at age 21 for example, leaving it open until you are 31 is 10 years of credit history! Now, other factors such as new lines of credit can affect your history because the credit bureaus calculate the “average” length of all of your accounts.
It is important to remember, that when paying off debt, it is ok to leave open credit card accounts after you have paid them in full. The only time I recommend closing them is if they charge a significant annual fee. Closing these accounts will eliminate that history and reflect negatively in your credit score.
4. Types of Credit: As we work down the list, these credit score factors to follow will have less effect on your score. One of them is having different types of credit and diversifying your credit mix. This factor has a 10% impact on your score.
I don’t recommend focusing on obtaining different types of credit because it has a low impact on your score and as you go into more debt, you open yourself up to more risk. I do recommend having a credit card, but it is not mandatory to go obtain an auto loan, personal line of credit, or student loan to increase your credit mix. Moreover, when you do get a credit card, I only advise to use it for basic necessities as stated earlier and pay it off every month in full.
5. Inquiries/New credit: The last and final factor is new credit/inquires which only impact 10% of your score. Inquiries occur when someone or a lending intuition reviews your credit report with the bureau of which they are inquiring (Credit Bureaus: Equifax, Transunion, and Experian). When you are approved for a loan or line of credit, this is now listed as new credit. If you have obtained more than 1-3 new lines of credit recently, most creditors will not approve you for anymore due to the increased risk
Hopefully, this helps everyone with building their credit moving forward and allowing you the opportunity to reach the 700’s or even 800’s credit range.
Remember, if you have collections, judgements, and other delinquent accounts, these can have long-term impacts on your credit for years.
If you need help with building your credit, and have additional questions, click on the “Ask Dan” tab for pricing. Feel free to share with your family and peers so they can start building their credit today! Thanks everyone for the support and look forward to hearing from many of you soon!
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