Your credit score is a three-digit number that conveys if you responsibly manage your debt obligations. The FICO scoring model used by 90 percent of lenders and creditors ranges from 300 to 850 – the higher, the better.
But maybe you’re wondering where your credit score comes from. In short, it’s made up of five distinct components – payment history, amounts owed/credit utilization, length of credit history, credit mix and types, and new credit.
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Main Factors That Affect Your Credit Score
Payment history is one of the most important components of your credit score. So, it’s vital that you pay your outstanding debts and bills on time to prevent any delinquencies from appearing on your credit report.
Amount Owed/Credit Utilization
How much of your credit limit is currently in use? This percentage is referred to as credit utilization and accounts for 30 percent of your credit score. For example, if you have three credit cards with $1,000 limits and owe $450 on each, your credit utilization comes out at 45 percent.
Length Of Credit History
How long have you had credit? If it’s only been for a short period, it could take some time for your score to reach an optimal credit score. But consumers with extensive credit histories and accounts in good standing generally have stronger credit scores. Credit age accounts for about 15 percent of your credit score.
Credit Mix And Types
Do you have a healthy mix of installment (i.e., personal loans, student loans, mortgage loans, car loans) and revolving (i.e., credit) accounts? Credit mix makes up 10 percent of your credit score. Lenders and creditors want to know that you can responsibly manage both types of credit.
Each time you apply for a debt product, a hard inquiry is generated and could drop your score by two to five points. However, involuntary soft credit inquiries have no impact on your credit score.
Other Things That May Affect Your Credit Score
There’s no way to prevent credit reporting errors. However, you can file prompt disputes to have the incorrect negative information affecting your credit score removed.
Depending on your credit rating, a missed payment could tank your credit score by up to 100 points. But they are only reported once an account is delinquent for 30 or more days, and the negative impact will dwindle over time.
Using Too Much Credit
If you repeatedly swipe credit cards without paying them down or off each month, your credit score could take a hit.
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Delinquent Child Support
Have you fallen behind on child support payments? It can be reported to the credit bureaus as a negative item and hurt your credit score.
Paying Off a Loan
Your credit score could fall when you pay off a loan due to a change in your credit mix. Fortunately, the impact is usually only temporary.
Closing A Credit Card
Closing credit card accounts will likely increase your credit utilization, which means your score could decrease.
Do you have overdraft protection for your checking account tied to a line of credit? If you accumulate a balance and fail to make timely payments, the delinquent line of credit may also be reported to the credit reporting agencies and hurt your score.
Getting A Credit Limit Increase
Assuming you refrain from using the credit card, a credit limit increase could lower your credit utilization rate and raise your score.
Things That Don’t Affect Your Credit Score
The following have no bearing on your credit score:
- Marital Status
- Race, Color, Religion, Ethnicity
- Occupation, Salary, Employment History, And Employer
- Where You Live
Ways To Improve Your Credit Score
Get A Credit Builder Loan
Credit builder loans offer consumers the best of both worlds. You can improve your credit score while saving money, and a hefty security deposit isn’t required. Here’s how they work:
- Get approved for a credit builder loan. The bank or credit union will deposit the loan proceeds into a savings account.
- Make monthly payments for the specified loan term.
- Receive the loan proceeds when the balance is paid in full.
Self offers three credit builder accounts if you’re interested in going this route. You won’t have to undergo a hard credit check to open an account, and there’s no minimum income requirement. Choose from one of the following:
- Small Builder: pay $25 for 24 months and get back $520
- Medium Builder: pay $35 for 24 months and get back $724
- Large Builder: pay $48 for 12 months and get back $539
- X-Large Builder: pay $150 for 12 months and get back $1,663
Pay Your Bills On Time
Be sure to make timely payments on your outstanding debt obligations and bills each month. Also, know the lenders and creditors won’t report an account until it reaches 30 or more days past due.
Minimize Your Debt
To give yourself the best chance at a good or excellent credit score, keep your credit utilization as low as possible. Lenders and creditors prefer to see this figure at or below 30 percent.
Your credit report may contain errors and outdated information dragging your score down. So be sure to review it regularly and file disputes if necessary.
Limit New Credit Requests
Several applications for new credit can also mean bad news for your credit score. If possible, limit any further requests for credit to avoid dinging your credit score while you work to improve it.