Knowing the components that make up a credit score is one thing, but actually understanding the specific activities that impact each component is the only way to help you finally move those numbers up. Here’s the breakdown of your credit report and how it affects your score.
Payment History: 35 percent
The general purpose of a credit score is to show how likely you are to pay back a loan, which is why a good track record is important. Your score factors in your payment history on current/past accounts and any public record and collection items. A few late payments won’t demolish your score, but your credit will drop significantly if it’s a regular problem. As for public record and collection items, this refers to bankruptcies, foreclosures, lawsuits, etc. These events are more serious and can create quite a drop in your score.
Tip: Enroll in automatic withdrawal to ensure timely bill payments. Late payments are the number one cause of declining credit scores.
Amounts Owed: 30 percent
An important factor of your credit score is your overall debt and credit utilization, which is the ratio of your credit balance to your credit limit. If your limit is $1,000 and your balance is $250, your ratio is 25 percent. Experts suggest keeping it below 30 percent. Keep in mind your score considers both the credit utilization rate for each account separately as well as the rate of all cards combined.
Tip: Try to keep your credit balances consistently below 30 percent. Don’t charge what you can’t pay back.
Length of Credit History: 15 percent
Your credit score considers how long your accounts have been open and how active those accounts are. This can be tough when age and experience come into play. It takes at least six months to even generate a credit score, so waiting until your mid-20s to build credit can be a problem. Additionally, your score calculates the age of your oldest account, newest account and the average age of all accounts, which is why it actually hurts your score to close old credit cards.
Tip: Don’t close your credit cards even if they have a zero balance (especially your oldest one).
New Credit: 10 percent
Opening multiple accounts in a short span of time represents greater risk. This can be difficult for young adults, since they already have less credit history due to age and are in the market for auto loans, higher credit limits and mortgages. Either way, it’s important to be strategic when shopping for a new loan or credit card because you don’t want your report to show that you’re constantly looking for credit.
Another major offender here is retail cards. The additional 20 percent off might sound tempting, but it’s not worth it when multiple new accounts actually lower your credit score. Retail cards themselves are okay, but just open (and use) them in moderation.
Tip: Avoid opening multiple accounts around the same time.
Credit Mix: 10 percent
Your credit score also looks at the different types of accounts you have: credit cards, retail accounts, installment loans, auto and mortgage loans. Ideally you want to have a mix of revolving and installment credit to show that you can handle both. Revolving credit is credit that does not have a fixed number of payments, like a credit card, whereas installment credit does, such as an auto loan.
Tip: Make sure you have different types of credit accounts.
Using a credit card or taking out a loan can be a huge hassle if you aren’t fully aware of the terms you’re agreeing to. Be sure to do your research, compare several offers and please, pay your bills on time.