Building your credit (or rebuilding it) can be a challenge. It can feel like a classic Catch-22. You can’t get credit unless you have it. It’s natural to want to get the highest credit score possible. But do you know which factors influence your rating?
At Addition Financial, we understand that credit can be confusing. With that in mind, we’ve put together this list of five factors that influence your credit rating. Understanding these can help you get the highest credit score you deserve.
#1: Payment History
The single biggest factor that influences your credit score is your payment history. If you’ve paid everything on time, your score will reflect it. But, if you have a history of late payments and charge-offs, it will negatively impact your score.
It’s also worth noting that not all late payments are equal. The later you are with your payments, the more impact it has on your rating. A late payment at 30 days will hurt you less than one at 90 days or more.
Overall, your payment history counts for 35% of your score. The best thing you can do to improve your score is to pay everything on time, every month.
#2: Level of Debt
The next key factor in determining your credit score is your level of debt, which accounts for 30% of your score. There are two elements here:
- The total amount of debt you carry
- Your outstanding balances compared to your credit limit, also known as credit utilization
To put it in simple terms, if you have a low balance compared to your credit limits, you’ll end up with a higher score than if you had a high balance. A person with a $100 balance on a card with a $500 limit looks better than one who’s carrying $8,000 of debt against a $10,000 balance.
The good news here is that paying down your balances can improve your score. If you pay more than the minimum each month, you’ll see it reflected on your report.
#3: Age of Credit
Another thing that affects your credit score is the age of your credit. That might sound like a strange term, but it boils down to this. The longer your credit history is, the higher your score will be.
If you’ve just been approved for your first credit card, your score here will be low. You haven’t yet proven that you can handle credit responsibly. Once you do – by making your payments on time every month over time – your score will improve.
This aspect of your credit history doesn’t count as much as the first two factors we’ve discussed. It’s worth a total of 15% of your score. As you might imagine, the only way to improve here is to sustain your accounts over time.
#4: Types of Credit
The types of credit you have can also impact your credit score. While credit types aren’t as important as some of the other things we’ve discussed, they are worth about 10% of your score. In general, it’s best to have multiple kinds of credit instead of just one.
The two main types of credit are:
- Revolving credit, which includes credit cards and lines of credit
- Installment credit, which includes mortgages and automobile loans
It’s better for your score if you have some of each type of credit, but don’t worry if you have only revolving credit. As long as you keep your balances in control, it won’t affect your score too dramatically.
#5: New Credit Inquiries
The fifth and final element that affects your credit score is the number of new credit inquiries on your account. Any time you apply for credit, it has a small impact on your credit score. Overall, new credit inquiries are worth 10% of your overall score.
If you’re not applying for new credit cards or loans, you won’t have to worry about this aspect of your score. However, if you apply for several new cards or accounts at once, it can have a measurable effect on your score.
The best way to combat this is to hold onto your current cards until you need a new account. For example, you might decide to consolidate your debt onto a low-interest card. To do that, it’s worth taking a slight ding on your score since it can save you money in the long run.
Whether you’re building your credit for the first time or trying to repair damaged credit, you’ll want to do everything you can to get the highest credit score you can. You have more control than you might have thought, and being aware of these five factors and how they impact your score is essential.
Posted on Feb 5, 2018
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