What Makes up a Credit Score?
What Makes up a Credit Score?
Everyone has a credit score, but not everyone has a good
credit score. Knowing what makes up these scores and how you can improve them
is important. While perfect credit isn’t necessary, the higher you can get your
score, the better rates and terms you’ll get on loans and personal finance
products when you apply for them.
Here’s what makes up your credit score.
Payment History
Your payment history makes up the largest part of your credit score and is the most important factor. Your payment history refers to how well you pay your bills on time and makes up 35% of your credit score.
The credit bureaus work in increments of 30 days. If you miss a payment by 30 days, your credit score will drop quite a few points. If you don’t make up the payment by the time it hits 60 days late, your credit score drops again. This keeps going in 30-day increments until the creditor charges off the account and sends it to a collection agency.
To keep your payment history in good standing, consider these tips:
- Pay your bills on time – The best thing to do is pay your bills on time. If you miss a due date, make sure you make the payment before it hits 30 days late, so you don’t risk hurting your credit score.
- Make up late payments – If you do fall behind, make your payments up as quickly as possible. Try to avoid getting 60 days or later on your debts.
- Call your creditors – If you can’t make your payments, don’t ignore them. Instead, call your creditors and see if they offer any payment arrangement options to avoid hurting your payment history.
Credit Utilization
Your credit utilization makes up 30% of your credit score.
This refers to the amount of credit you have outstanding compared to your total
credit lines. If you have a large amount of credit outstanding, it can indicate
that you are overusing your credit and could be a high risk of default.
This makes it harder for lenders to approve your loan applications because you already have a lot of debt outstanding.
The credit bureaus compare your credit utilization in a couple of ways:
- The balance of your credit cards is compared to your available balance. The more you have charged (not paid off), the worse it is for your credit score. Try to keep your utilization rate at 30% of your available balances.
Credit History Length
Your credit history length makes up 15% of your credit score and is why people just starting their credit have a tougher time getting a higher score.
It can be hard to start building your credit when most banks and lenders won’t lend to you if you don’t have credit. The easiest way to start building a credit history, though is by applying for a secured credit card. You don’t need a credit history to get one and most credit card companies report them to the credit bureaus to help you build a history.
To keep your credit history length as long as possible, consider these tips:
- Use your accounts to keep them active
- Don’t close old accounts, keep them open even if you don’t use them
- Only apply for new credit when necessary
Your credit history length is an average of all of your
credit ages. Each time you apply for and take out new credit, you lower your credit
history length. Spread out how often you apply for new credit and offset new
accounts with old, established accounts for the best results.
Credit Mix
Your credit mix makes up 10% of your credit score. This allows creditors to determine how well you handle different types of credit. A good credit mix has a combination of revolving debt and installment debt.
There isn’t a certain number of each account you should
have, though. Only open accounts that you need and don’t have an excessive
amount of either type of accounts (installment or revolving).
Because credit mix is only 10% of your score, put more emphasis on making your payments on time, but keep in mind that you shouldn’t have too many credit cards or installment loans to improve your credit score.
New Credit
New credit refers to the number of inquiries you have on your credit report. A lender does a hard inquiry each time you apply for new credit. These inquiries stay on your credit report for 2 years, but they only affect your credit score for 12 months.
How new your credit is also affecting your score, but new credit only makes up 10% of your credit score. However, each time you take out a new loan or credit card, it affects your credit score in other ways including lowering your credit age, increasing your credit utilization, and it may affect your payment history if you don’t make your payments on time.
Final Thoughts
Your credit score is an important piece of the puzzle when you’re applying for new loans or even trying to get a job or new insurance.
Knowing what makes up your credit score and how you can improve it can help you get the most favorable terms. To keep your credit score high, make your payments on time, don’t overextend your credit, and keep your new credit inquiries and new loans to a minimum.
Your credit score changes monthly so there’s always time to improve your score if you find that it drops. Mistakes and life happen but know that you can always pick up the pieces and improve your score just by improving your credit habits.
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