A credit score is based on the information listed in your credit report. Credit scores are used by lenders to predict how likely you are to repay money that you borrow. The higher your score, the more likely they believe you are to pay back loans on time and in full.
Your FICO score is determined by both positive and negative factors on your credit report. Increasing your credit can take some time, but it’s a pretty straight-forward process once you understand the basics.
According to FICO, marital status, employment, age, child/family obligations, and your salary do not contribute to the determination of your score. That doesn’t mean your lender won’t include these things, but your credit is not factored by them.
What makes your credit score go up? What can make it go down? How long does it take to repair your credit? These are all great questions, and most can be answered by learning more about the five factors that go into determining your credit score.
FICO credit score makeup:
● 35% = payment history
● 30% = amounts owed
● 15% = credit history
● 10% = credit mix
● 10% = new credit
The most crucial and heavily weighted factor in determining your credit score is your payment history. In fact, it accounts for up to 35% of your credit score. This means if you’ve been behind on even a few payments, your credit score has probably plummeted. To avoid this, make sure that you’re keeping track of your bills and when they’re due. Always do your best to pay on time if not early.
The next largest chunk weighted towards your credit score is amounts owed. This doesn’t necessarily mean the monetary value of your debts, but how much of your credit you’re currently using. This means if you have credit cards with limits totaling $10,000 and you’re utilizing $7,000 of those limits, you’re using 70% of your credit. For best results, you want to stay under 15% utilization. Start paying those cards off if your utilization is over 15%.
Set balance alerts on all of your credit cards to make sure you realize when your credit utilization creeps up. This way you’ll also be more mindful when you’re using credit to pay for something.
While length of credit history only accounts for 15% of your credit score, it can be the determining factor between a 750 score and an 800 score. Keeping your cards open (even if you don’t keep a balance on them) will keep the clock ticking towards your credit history length.
A credit mix means you have a varied combination of credit cards, retail accounts, mortgage loans, etc. You don’t have to carry all of these, but 10% of your credit score is determined by your credit mix. Lenders also may dig a little deeper into your credit mix. They want to know you can handle paying on multiple types of accounts every month.
If you’ve opened several new accounts in a short amount of time – even over the course of a year – that makes lenders see you as a higher-risk borrower. Try not to open more accounts than are necessary to establish and grow your credit. Plus, every time you open a new card or secure a new loan, your credit history length (average) goes down.
There are two types of accounts that impact your credit score: revolving accounts and installment accounts. Credit cards and lines of credit are revolving accounts. Student loans, car loans, personal loans, and mortgages are all installment accounts.
Revolving credit is credit that is renewed as the debt is paid. Installment credit is an extension of credit by which fixed, scheduled payments are made until the loan is paid in full. (Source)
Don’t worry about increasing your limit over and over again. Studies show that a $500 credit card can have as big of an impact as a $20,000 loan. While increasing your credit limit can help you keep your utilization lower, you don’t have to stress if your limits stay low – that’s perfectly normal while building credit.
It may seem like a lot to comprehend when you’re looking at all of the factors that make up your credit score, but it’s pretty simple once you get the hang of it. Missing payments, utilizing too much of your available credit, opening multiple new accounts in a short period of time, and defaulting on accounts can all tank your credit score.
Keeping a mix of credit products up to date can increase your credit score dramatically. On the other hand, missing a payment can do the opposite.
