If you are not happy about your credit score, you aren’t alone. Lenders consider people with a credit score of over 700 to be good (credit scoring models range from 300 to 850). The average of the country is below what is considered to be a good credit score, and some work has to be done to improve this. The good thing is credit scores are not permanent and there are several ways of improving them. The most important part is to know what affects your credit score. Payday loan provider Loanza shares the main things that impact on your credit score.
According to research by financial companies, there are five components making up the credit score. Below are the five components and five tips that will help you improve your credit score.
1. Payment history
Bill payment history (both revolving credit accounts and installment loans) has the biggest impact on your credit score. This makes it the most important thing to focus on when improving your credit score.
Weight on credit score – 35%
Tip: while you cannot do anything about payments you might have missed in the past, you can avoid the same issue by making your payments on time, and a good way of doing this is by setting up autopay covering your account minimum (you should switch to online payments if you still pay using a check because it is faster and more convenient). When possible, pay all of the balance, but when you have autopay set up to cover the minimum, you will always make your payments on time. If you happen to miss a payment, try paying as soon as possible because the more you wait, the more damage is going to have on your credit score. It is also a good idea to reach out to your lender if you are late on your payment. If late payment was because of an honest mistake, they could understand and not increase your Annual Percentage Rate (APR)
2. Credit Utilization
This is calculated by dividing the credit you are using with the credit you have available. It is also known as the credit utilization ratio (keep in mind that this doesn’t factor in debt from installation loans like an auto loan or a mortgage loan). When calculating credit scores, both overall credit utilization and per-card credit utilization are considered. In both instances, a credit utilization of less than 30% is considered good. If you have a credit utilization of over 30% of your revolving credit limit, it is going to result in a drop in your credit score. Credit utilization of less than 10% percent is considered excellent.
Weight on credit score – 30%
Tip: Credit utilization is the second most important factor when it comes to credit scores, and the good is you will have an easy time fixing it. Many people with credit cards have a balance month to month. If you have a credit utilization of over 30% on your cards, make it your goal to pay down ASAP. The goal should be clearing it in full, but if you are not in a position to do this, you can do it slowly. A good way is setting a fixed amount to deduct from your paycheck to slowly pay back the debt. Doing this will help you avoid paying unnecessary interest. Another thing to keep in mind about credit utilization, even if you pay it off in full at the end of the month, but you still use over 30% at any given time, it is going to hurt your credit score.
3. Age of credit
This combines how long you have had the credit for, and the average age of the accounts. You will score higher depending on your history of responsible management of the accounts. The longer the history, the better.
Weight on credit score – 15%
Tip: This step can be a little tricky because you have to start somewhere when it comes to building your credit, and the only way you are going to do it is by proving you can manage it over time. People who have accounts of more than 11 years have an average score of 745 compared to those with accounts 5-10 years who have an average of 633. While you cannot quickly increase the age of the credit, the best way is to avoid lowering the average age. This means avoid opening too many new lines of credit at the same time (this is even more important for people who have recently established their credit history). A good way of lengthening the average age of credit is to leave old credit card accounts open, even if they have minimal activity. This will also help in lowering your credit utilization ratio.
4. Credit mix
This means having a wide range of credit that includes revolving credit (like credit cards) and installment loans (the ones with level payments like mortgage and car loans).
Weight on credit score – 10%
Tip: Good credit involves showing the lenders you are responsible with your finances, and when you have a diverse credit mix, you prove that you can manage multiple types of credit. If you want to score high, you need to have a diverse variety of open accounts showing the lender you can make regular fixed payments and paying them off. When opening new accounts, always keep in mind that it lowers your average account age, which hurts your score.
5. Number of credit inquiries
When applying for a loan or a new credit card, it is going to be considered a “hard” inquiry on the credit report. This will end up lowering the score for up to six months. Employer checks, self-checks, prequalifying checks, etc. are known as “soft inquiries” and do not affect your score.
