There are several reasons why you would want to increase your credit score. Higher credit scores will allow you to borrow more money at lower interest rates. High credit scores will help increase your card limits, increasing your chances of making significant purchases like buying a home or a car.
In this article, we will be taking you through the factors that affect credit scores.
Payment History
Failure to pay bills, especially on active credit cards, will negatively affect your credit score. FICO, and other credit scoring models, use payment history to calculate your credit score. Payment history will account for 35% of the credit score.
The following are included in the payment history:
- Home Mortgage
- Medical bills
- Student loans
- Car loans
- Store credit accounts
- Cell phone bills
Delaying a single payment will not considerably affect your credit score, but several delays will. A late payment pattern signals the creditors that your credit risk is high.
Credit Utilization
Despite sounding complicated, credit utilization refers to a number that reveals how much of the available credit is in use. For example, if you have $10,000 on your credit card and are charged $3000, you have 30% utilization for the card.
The credit card score factors in all the loans and credit cards and sums up all you owe before comparing it to the available credit limits.
Improving credit utilization is a reliable and fast method of boosting a credit score. Fico and other models prefer below 30% utilization. If you are above that, consider paying a card or two, which will help improve your credit score.
Credit History and Age
Are you young and just starting with credit? If yes, the score will always reflect that! Credit Age caters to 15% of the credit score. Most scoring agencies will consider your oldest account age and all your accounts' average age.
If you are a new credit holder, you can never do much but continue using your credit well as you wait for the account to age.
Shutting the old accounts even when you do not use them and opening a new account will reduce the overall account age.
Account Types and Credit Mix
There are two types of credit accounts: Installment loans like car payments and mortgages and revolvings like credit lines and credit cards. Having both will help keep your credit score in top shape.
You can never forget about variety, primarily when covering credit scores. Most lenders prefer seeing you are capable of handling different credit accounts and loans. You will always receive rewards for the different credit types you handle responsibly with a better credit score.
Credit Inquiries
There are two types of credit inquiries Hard inquiry and a soft inquiry.
In hard inquiry, lenders will run credit reports whenever you apply for a loan or credit card. The inquiry can affect your credit score by some points for some time.
Most companies and landlords run soft inquiries before they can consider doing any business with you. In most cases, you will never know they have made a soft inquiry. Since it is never a big deal, it will never affect your credit score.
Conclusion
Your credit score is essential in getting the best interest rates and loan approval. However, you should never be obsessed with the high-scoring guidelines to achieve the credit score most lenders want. All you have to do is manage the credit responsibly, and the scores will shine.