Your credit score, commonly known in the U.S. as your FICO score, follows you throughout life: Whether you’re swiping your credit card for lunch, getting a student loan, or buying a house, your credit score matters. The worse your credit score, the more it will cost you to borrow money. In other words, low credit scores lead to high interest rates on credit, meaning you’ll be paying a higher amount of interest on loans than you would be if you had a high credit score, such as on a mortgage. That magic number between 300 and 850 also affects how nice of an apartment you can afford, auto loans, how much you pay for insurance, student loans, and even your ability to get a job. Raise your credit score to increase trust and decrease risk with future landlords, lenders, and employers.
Top five factors that affect your credit score
Improving your credit score doesn’t have to be rocket science. To make the biggest dent in your credit score, here are the five biggest factors that affect your credit score, and what you can do about them:
1. Payment history
Making up about 35% of your credit score, a positive payment history shows you can be trusted to pay back money borrowed in a timely manner. If you pay your bills late, the later you pay, the more it affects your score. If you are unable to pay your bills, and your account goes to collections, you file for bankruptcy, or your house forecloses, your credit score will be hit hard.
What you can do: Paying your bills on time each month in full is one of the best things you can do for your credit. Put monthly reminders on your calendar days in advance to make sure you never miss a payment.
2. Amounts owed
Amounts owed determines about 30% of your credit score. Amounts owed refers not only to the amount of loans and credit you owe in total, but also to the percentage of available credit you’ve used. For example, if you have a credit card with a credit limit of $1,000 and you spend $900 per month on that credit card, that means you’re spending 90% of your available credit on that card, which can hurt your credit score. On the other hand, you don’t want to be spending 0% of your credit limit. It’s good to have some amount of money you owe and pay off in order to build a credit history and prove your reliability as a borrower for future loans.
What you can do: It’s a common rule to spend less than 30% of your available credit in order to raise your credit score. Be careful to not let spending on rewards program credit cards get your amounts owed out of hand. Even if you pay off your total balance in full monthly on your credit card, you will still get your credit score docked for spending high percentages of your total credit limit.
3. Length of credit history
While a long credit history isn’t necessary for a good credit score, it certainly does help. The longer you can show you’ve been reliably paying off debts, the better it is for your credit score. The length of your credit history makes up about 15% of your credit score.
What you can do: If you have no credit history—never had a credit card, student loan, mortgage, or other type of loan—it may be helpful to get started. An easy way to start building credit is by getting a basic credit card, spending a small amount on it each month (5%-10% of your credit limit), and paying it off in full and on time each month. FICO’s own site says that people with a history of reliably paying off credit cards are deemed less risky than people who have no credit cards. If you do have a credit history, and it’s not the best, focus your main efforts on payment history and amount owed to start improving it now.
4. New credit
The amount of new credit you’ve applied for makes up about 10% of your credit score. If you apply for several new lines of credit, this signals that you might be spending a decent amount more money than you are making, implying you might not be able to repay new debt as reliably as before. A large influx of new credit makes you look more risky to lenders.
What you can do: Don’t open unnecessary lines of credit, and don’t open more than one line of credit at a time. Try to space out things like new student loans, new credit cards, new auto loans, and a new mortgage. The more you can space out your loan applications, the better for this part of your credit score.
5. Mix of credit
The mix of credit you have is about 10% of your credit score. If you’ve proven to successfully manage multiple types of credit, from credit cards to mortgages to student loans, you appear less risky to lenders than someone who has only successfully managed one type of credit.
What you can do: Don’t take on a loan you don’t need just to increase your mix of credit. Remember, opening a new line of credit will decrease your credit score, and if you can’t pay it off reliably, it will really decrease your credit score. However, reliably paying off a new type of credit over time will eventually increase your overall score, despite the initial hit your credit score took when you opened that new line of credit. Rather than acting on this one, just know that as time goes by and your credit grows and diversifies, your credit score will grow, too, assuming you make your payments on time each month across your various types of credit.
Raise your credit score
Improving your credit score is pretty intuitive when you think about it from a lender’s point of view: Those who pay a variety of credit types in full and on time each month appear reliable. The longer they’ve been doing this, the more trustworthy they appear. Plus, if they haven’t needed to apply for a new line of credit in a while, and they’re only borrowing a fraction of the money that they could be borrowing, it looks like they aren’t having any cash flow problems, and should therefore be able to pay back a loan plus interest with no problems.
Now is your chance to take an actionable step toward improving your credit score. Whether that’s setting monthly calendar reminders days in advance to help you remember to pay off your credit card bill on time, decreasing the amount you spend on your rewards credit card even though you pay off your total balance every month, or you decide to wait on opening a credit card because you just took out a student loan or mortgage, you’re making progress.
Check your credit score—without it getting hurt
Contrary to popular belief, you can check your credit score without hurting your credit score. Checking your credit score is called making a “soft inquiry.” However, your credit score does get lowered when you make a “hard inquiry,” which happens when you apply for a new line of credit, whether it’s a loan, credit card, or mortgage.
Generally, a score over 750 is amazing, 700-749 is good, 650-699 is fair, 600-649 is poor, and below 600 is bad. Make a soft inquiry and check your credit score today to gauge what your credit score is. Since it takes time to increase your credit score, it’s best to start improving your score now. That way, when you take out a loan, buy a house, or open a new credit card in the future, you and your credit score will be ready to shine.
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