How is your credit score composed and how can you improve it?
Simply said, your credit score represents your ability to pay back a debt. And can range between 300 and 850.
A higher score tends to show a creditor that there is less risk in loaning you money as you have proven to have a greater ability to pay back your debts. A score above 740 is generally deemed to be excellent.
On the contrary, a lower score tends to show a creditor that there is greater risk in loaning you money and often results in higher rates for you to borrow the money, or not even being offered the loan. A score below 620 is generally concerning to a lender.
The score is made up of the following:
35%* of it comes from payment history. This part reflects your ability to make payments on time, the number of payments you’ve missed, and how late they are compared to the due date.
Ways to increase this part of your score is to…make payments on time by paying special attention to the due dates or automating payments for bills to reduce the likelihood of missing them.
30%* of the credit score is based on the amount of money you owe in loans and credit cards. The best way to improve this part of your score is to reduce or pay off the balance of your loans and credit cards.
15%* of the score is based on the length of your credit history. A long history of credit with timely payments will result in a higher score. To avoid applying for credit, especially when young, can hurt this part of your score in the long run as lenders will have no credit history to review. As long as you are being responsible by paying them off and not racking up debt!
10%* of the credit score is based on recent credit activity. If you have recently applied for or opened many new accounts, it can have a negative affect. Lenders view an influx of new credit accounts as a potential financial struggle. To avoid getting dinged on this part, avoid opening many accounts or signing for new loans in a short amount of time. As an example, opening cards at many retailers consecutively for their “discounts” or “rewards” can negatively impact your score.
10%* of the score is based on types of credit being used. The focus here is to see what experience you have with each type of account. 3 main types of credit include car loans, credit cards, and home loans. This is not usually a primary factor in your score, but can be important if there is not much other information on your credit report. But diversification can help!
Although your credit score can be improved, it’s important to realize that it does not improve instantly since it is heavily comprised of payment history. Starting timely payments and working toward paying off outstanding balances at least starts the clock ticking, but it can take years to fully rid a history of delinquent payments. There are more advanced methods of credit repair that can have more immediate impact as well.
Thanks for reading!
*Source of facts and figures is http://www.myfico.com/CreditEducation/ WhatsInYourScore.aspx on 9/24/15.