Understanding Your Credit Score
- A credit score tells lenders about your credit worthiness (how likely you are to pay back a loan based on your credit history).
- Credit scores influence the credit that’s available to a person and the terms (interest rate, etc.) that lenders may offer. It’s a vital part of credit health.
- A credit report is a record of your credit history, including your credit accounts, how often you apply for credit, debt collection accounts and some public records, including judgements, liens and bankruptcies.
Your Scores Are Based on Five Core Factors
Payment history: Weighted at about 35% of your credit score, this takes into account any late payments. On time payments are a huge plus when trying to repair your credit score.
Credit utilization: About 30% of your credit score is derived from Credit Utilization. This takes into account how much of your available credit you are using. On average your utilization should be less than 30% of your available credit. Meaning that if you have $9000 in available credit you should carry a balance of no more than $3000. This is across your entire available credit, so if the ration on one particular card is higher than 30% it won’t matter as long as your overall debt ratio is 30% or less.
Average age of credit accounts: The older the account or card the better. Long-term history of financial responsibility are about 15% of your overall credit score. 10 plus years is considered excellent. This is why closing cards you are no longer using is a detriment to your score. Leave that college credit card open to add to your available credit and credit history.
Account types: The mix of types of accounts you have makes up 10% of your credit score. Revolving credit like credit cards can be beneficial to your score, but also having car or home loans shows creditors that you are responsible at handling a number of different types of accounts.
Inquiries: This is another 10% of your score and probably the least important factor. It’s just smart to keep in mind that creditors get nervous is they see too many inquiries into your credit in a period of time. If they see you applying for multiple lines of credit it could result in denial.