This week on the blog...
Today I will be talking about credit scores, as we know good credit is important part of any borrowing - mortgages, loans, credit cards, etc. And despite what many think, borrowing can and does lead to PROFIT in lots of cases!
So, what affects credit scores?
There are multiple factors that can affect your credit score. Things like bill-payment history, credit utilization, age of credit accounts and recent credit inquiries can all play a role. The number and types of balances you have can also impact your score. Ultimately, each lender uses their own credit policies to determine an applicant’s creditworthiness. But a good credit score can still mean you’re more likely to qualify for a loan or get a better interest rate.
How Is Your Credit Score Calculated?
A variety of factors are taken into consideration when calculating your credit score. The most popular criteria are:
1. Payment history:
This makes up 35% of your credit score and is the most important factor influencing your score.
2. The amount owed:
This makes up about 30% of your credit score.
3. Length of credit history:
The longer this is, the better. It makes up about 15% of your credit score.
4. New credit history:
The recent activity on your credit histories, such as new accounts and inquiries account for approximately 10% of your credit score.
5. Types of Credit:
The different types of credit accounts you have opened make up the remaining 10% of your credit score.
Steps to Maintaining Your Credit Score
A good credit score depends on using credit responsibly over time. Here are a few tips to help keep your score up:
1. Pay Your Bills on Time
Paying your credit card bills and other loans on time is important—especially since a history of late or missed payments could cause a dip in your credit score.
If you’re concerned about missing a due date, I always recommend setting up PAP’s (pre authorized payments) automatic payments to help you stay on top of your account payments.
2. Stay Below Your Credit Limit
Try not to use up all of your available credit. The rule of thumb is 30%. What does that mean? It is recommend keeping your credit utilization below 30% of your available credit. So if your limit is $10,000.00 - try to keep a balance under $3k.
3. Maintain Credit History With Older Credit Cards
Account history is another factor in your credit score. So the longer you show good credit habits, the better it could be for your score. Closing a credit card account can increase your credit utilization rate, since it reduces the amount of credit you have available. Plus, depending on the age of the account, it could reduce the length of your credit history. And both these factors could lower your score. Keep in mind that a card issuer may also choose to close a credit card account for reasons like low usage.
4. Apply for New Credit Only as Needed
You may want to consider what credit you need before applying for a new card. Several credit applications in a short period of time could have a negative impact on your score.
5. Check Your Credit Reports for Errors
Proactively checking your credit report for errors is another way to help maintain a good score. You may be doing everything right, but others may not. And errors can potentially hurt your credit scores. You can do so for FREE on Credit Karma or TransUnion.
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