Your credit score is something you can’t take for granted. It can affect your ability to get a loan, rent an apartment, and even get a job. Even some companies that offer fast cash loans can’t help you if your credit score is too low. It indeed shows how crucial this is for each individual. That’s why understanding what goes into making up your credit score and what you can do to improve it is important. This post will shed some light on the five factors that make up your credit score: payment history, debt utilization ratio, length of credit history, new credit accounts, and types of credit used. We’ll also give you some tips on how to improve each factor. So, let’s get started.
Payment History
Payment history is the most crucial factor in your credit score. It makes up 35% of your score. That’s why it’s important to always make your payments on time, every time. If you have any late payments, collections, or bankruptcies on your credit report, it will negatively impact your score. It won’t happen overnight, but your score will gradually improve as you continue to make your payments on time. That’s why you need to be sure you always make good progress with your payments.
Debt Utilization Ratio
Your debt utilization ratio is the next thing that could actually affect your credit score. It makes up 30% of your score. This is the amount of debt you have compared to the amount of credit you have available. The lower your debt utilization ratio, the better. Ideally, you should keep your debt utilization ratio below 30%. If it’s higher than that, it will harm your score.
Length of Credit History
The length of your credit history makes up 15% of your credit score. This is the amount of time you’ve been using credit. The longer you’ve been using credit, the better. It indicates you’re a trustworthy borrower who can be trusted to repay your debts. However, if you don’t have a long credit history, that’s not necessarily a bad thing. You can still build up your credit by making on-time payments and keeping your debt utilization ratio low.
New Credit Accounts
The next thing that can make or break your credit score is your new credit accounts. In short, it makes up 10% of your credit score. Opening a new account can lower your credit score because it shows you’re taking on more debt. However, as long as you manage your new account responsibly, your score will eventually go back up. Just be sure to keep your new account balance low and make your payments on time.
Types of Credit Used
Last but not least, the types of credit you have can do so. Here, it makes up 10% of your credit score. There are two main types of credit: revolving and installment. Revolving credit is like a credit card, where you have a limit and can borrow against it as you need. Installment credit is like a loan, where you borrow a set amount of money and have to pay it back over time. The mix of both types of credit is suitable for your score. It shows you’re able to handle different types of debt responsibly.
So those are the five factors that make up your credit score. As you can see, payment history is the most crucial factor. But all of these factors are important in different ways. By understanding how each one works, you can take steps to improve your score and get the credit you deserve.
