What makes up your credit score?
Credit scores can be an intimidating topic. It’s easy to think that understanding credit scores and how they work is too complex or confusing, but the truth is that with a little knowledge and effort, you can easily understand your own credit score.
Whether you’re looking to buy a home, finance a car, or get a loan for college tuition, your credit score will be taken into account by potential lenders. But what makes up a credit score and how does it influence your ability to access the funds you need?
Read on to learn more about this important number:
The Basics
Your credit score is a numerical representation of your creditworthiness. Created by the three main credit bureaus—Equifax, Experian, and TransUnion—your score is based on the information in your credit report. Most scoring models range from 300 to 850; higher scores indicate better creditworthiness while lower scores can make it difficult to be approved for credit cards, home mortgages, rental properties, etc. It will also give you less access favorable loan terms.
Breaking Down The Credit Score Components
The credit scoring model uses five different components to determine your overall score. Those components are Payment History (35%), Amount Owed (30%), Length of Credit History (15%), Types of Credit Used (10%), and New Accounts Opened (10%).
All five of these components come together to create your total score.
Payment History
Your payment history is the most important factor in determining your overall credit score.
This factor looks at whether or not you have consistently made payments on time for all of your accounts—credit cards, student loans, car loans, etc.—and if there have been any late payments, bankruptcies, collection accounts, repossessions, foreclosures or judgments against you in the past seven years.
It’s important to make sure you pay all bills on time and avoid late payments as much as possible; even one missed payment can have a major impact on your overall score.
The better you are at making on-time payments for all of your accounts, the higher your payment history score will be. And the higher this number is, the better it will be for your overall credit score.
Amount Owed
This factor looks at how much debt—owed money—you currently have as compared to other people with similar credit profiles. If you owe more money than others with similar backgrounds then it could make a negative impact on this portion of your score. The lower amount of debt you owe relative to others will help improve this part of your credit score calculation.
This factor looks at how much debt you currently owe versus your total available limit across all accounts, such as lines of credits, mortgages, and other loans. Aim for keeping balances low relative to the total amount available in order to maintain good scores here.
But keep in mind that having no debt isn’t necessarily a good thing either; lenders like to see that you are able to handle debt responsibly before they decide to lend money or extend lines of credit to you.
So take care when managing this balancing act!!
Length Of Credit History
This component looks at how long you’ve been utilizing different types of accounts.
Lenders prefer applicants with longer histories since they usually demonstrate reliable behavior over time.
Therefore it’s best not to close older accounts if possible as this can hurt your scores here.
Types Of Credit Used and New Accounts (Hard Inquiries)
This factor looks at how many new accounts you have opened over the past 12 months and what types of accounts those are—credit cards vs personal loans vs car loans vs mortgages etc…
While having just one type of account may suffice for some people, having multiple types tends to demonstrate stability which is valued highly by lenders when assessing risk levels.
Examples include installment loans such as mortgages or car loans along with revolving accounts like lines of credits or store cards
A mix of different types along with responsible use is key here!
Lenders like to see someone who has had experience using different types of credit but not too much experience opening new lines for too quickly as this suggests potential riskiness as an individual consumer/borrower.
In other words don’t open too many new accounts in quick succession and try not to open more than 1 every 6 months or so not only because it’s unnecessary but also because it can cause damage to your overall credit score calculation as well!
Your credit score plays an important role in life decisions such as getting approved for a loan or mortgage, receiving competitive interest rates on insurance policies, qualifying for certain jobs depending on their requirements and even qualifying for certain apartment rentals!
By understanding the components that make up their reports and taking actionable steps towards building your credit over time such as paying bills on time and avoiding opening unnecessary new accounts, you can achieve higher scores that will serve you well both now and in the future!
