Throughout our lives, we are slotted into a wide range of categories for several reasons. But one of the most important numbers assigned to us is our credit score.
It determines what interest rates you pay for any credit cards or loans you receive. It can determine how much you pay for insurance, or even whether or not you get the job you want.
Because our credit score can have a significant impact on our lives, it is worth learning how it is determined and what influences its movement up or down.
You may not realize that even little problems like a few late payments can affect your score for 18 – 24 months. How you handle such issues today can make a huge difference in how easy it will be to live your life going forward.
- Payment History
Did you know that 35% of your credit score is determined by your payment history?
Paying your bills on time can impact your score more than anything else. If you have damaging marks on your credit like charge-offs, bankruptcies, repossessions, or collections, it could take you out of the running for years.
In fact, it could be nearly impossible to get any credit approval for up to seven years with little to no chance of recovery.
- Your Credit Practices
Another 30% of your credit score is determined by how you use your credit. If you are maxing out your credit limit, you are treading in pretty dangerous waters.
If you are one that habitually charges up to the maximum allowable limit, you’re likely to see your credit score take a significant drop.
However, if you can resist the urge to spend and consistently maintain a low balance, you should see your score go up.
- How Long You’ve Had Credit
The age of your accounts can make up to 15% of your credit score.
There are two ways they can analyze your account. They could look at how long you’ve had your oldest account, or they could determine the average age of all your credit accounts combined.
If you have older accounts that are still in good standing, you’ll have a higher score than someone who has only a recent credit history. For this reason, it is best to keep your accounts open even if you have already paid them off so you can maintain a higher credit score.
- Type of Credit
Another critical factor to look at is the type of credit you have. If you have a lot of credit cards or personal, unsecured loans, it could influence your score negatively.
It is better to have a good mix of different types of credit. For example, if you have a mortgage and an auto loan, it would be better than if you have a lot of credit cards.
Unsecured loans are usually accompanied by higher interest rates. They are, therefore, more likely to fall into a high-risk category than a secured loan.
Every time you apply for credit, an inquiry is logged into your report. These inquiries could account for as much as 10% of your score.
It is wise, therefore, not to have too many. Generally, if you have only one or two, it shouldn’t have an impact. Still, if you have more than that, especially over a short period of time, it could really cause you to lose points.
The good news is that these inquiries do not last for the usual seven years, like other types of credit. They drop off after only twelve months.
Unless you are prepared to live a life of cash on hand, it is smart to use your credit wisely.
However, when you know just how much weight each of these factors can be used to influence your report, it can help you to make smarter decisions about how you use your credit.
This will also allow you to identify those areas where you might need to improve so you can take steps to get your credit score up as high as possible.