Credit scores are a complex calculation that credit bureaus come up with to predict your future payment behavior. There are lots of different factors that affect a credit score. FICO scores consider five key areas, in order of importance.
1. Payment history
One of the most important aspects of a credit score is your payment history. This is the easiest way for lenders to predict what you’ll be like with future debts.
Your payment history makes up 35% of your FICO credit score calculation. Credit bureaus take into account how quickly you pay your bills and debts, paying particular attention to late payments, collections, repossessions, foreclosures, and bankruptcy.
The best way to ensure your payment history is squeaky clean is to ensure you’re paying everything on time and in full.
2. Amounts owed
The next most important element of your credit score is how much credit you’re currently using. This makes up 30% of your FICO score.
Your credit utilization ratio is calculated by dividing the total amount of credit you’re using by how much you can take out. The general rule of thumb is that using more than 30% of your available credit is a bad sign for lenders.
To avoid this becoming a problem, try to reduce your credit utilization. Work on reducing your current debt but don’t close any credit cards as this will also reduce your credit limit.
3. Credit history length
You may have a perfect payment history but if that history only goes back a couple of months, it doesn’t tell creditors much.
Your credit history length makes up 15% of your FICO score. Your score is calculated based on the age of your oldest and newest credit accounts. The longer your credit history, the higher your score will usually be.
While you can’t go back in time, you may want to wait longer to apply for bigger types of credit such as a mortgage if your credit history is only a few months old.
4. Credit mix
The next thing that affects credit score is what types of credit you have. This accounts for 10% of your FICO score.
A good mix of credit could include a car loan, credit cards, a mortgage, or student loans. Credit bureaus look at how well you can manage a range of different credit products.
Keeping your debts spread across different accounts is a better sign than having a big chunk of credit card debt and nothing else. However, that doesn’t mean you should rush and open several accounts at once because this can have the opposite effect.
5. New credit
Another thing that impacts your credit score is how much new credit you’ve recently taken out. Credit agencies don’t like to see too many new accounts or recent hard inquiries on your record. This suggests that you’re struggling with money and can make your credit score take a dip. The new credit aspect of your credit score accounts for 10% of your FICO score.
If you are looking to take out credit, make sure a good amount of time has passed since you last took out credit. For example, if you want to apply for car finance, avoid taking out a personal loan right before it.
Top things to avoid
To maintain a healthy credit score, some of the top things to avoid include:
- Missing payments or paying late: One missed payment from years ago could harm your chances of taking out credit in the future.
- Using too much of your available credit: A high credit utilization does not look good to lenders. Avoid using more than 30% of your available credit, or if possible, even less.
- Applying for a lot of credit in a short space of time: Hard inquiries on your credit can damage your score temporarily, and applying for lots of credit in a short space of time makes you look like you’re in a poor financial situation.
- Defaulting on credit: Any instances of bankruptcy, foreclosure, or repossession can harm your credit score for years.
The best thing you can do for your credit score is to become more intentional with your spending and credit utilization. Ensure you’re always making payments for bills and debt on time, and try to reduce your debt as much as you can.
If your credit score looks unusually low, there’s always the possibility that there’s an error on your file. Raise any inquiries with the main credit bureaus, Experian, Equifax, and TransUnion, as soon as you can to avoid further damage.
Lastly, make sure you get into the habit of checking your credit score regularly. That way, you can spot any discrepancies quickly and get them resolved before they do any more damage.
Managing and improving your credit score is a lifelong project. If you find you’re doing the right things but still need money today, consider a short-term emergency loan from Jora Credit. Apply today here.