If you’re looking to get a credit card or to take out a mortgage to purchase your first home, credit is an essential tool for helping people to meet their goals. When applying for a line of credit, the higher your credit score, the more likely you will be to qualify, the more options you will have available, and the better interest rate you will receive. Here are the 5 factors that influence your score and how to give your score a boost.
Payment History (35%)
Payment history is the biggest factor used to calculate your credit score. Late payments (even a couple of days), past due accounts, and accounts in collections all have a negative impact on your credit. Regular, on-time payment of the minimum amount or greater will improve your score. An on-time payment history in the range of 18 months or longer will begin to show results in a growing credit score. If your late payments are due to forgetfulness, set up automatic payments. If you’re having trouble making ends meet, call your creditors and request a forbearance or payment deferral. They may also be able to waive late fees or even allow a lower payment for a period of time.
Amount Owed (30%)
Your credit utilization is determined by the amount you owe compared to the total credit limit available to you, expressed as a percentage. As a rule of thumb, your credit utilization should be no more than 30.
If you can make small payments throughout the month, this can help keep your balance down and lower your credit utilization. The simplest way to decrease your credit utilization is to ask for a credit line increase.
Length of Credit History (15%)
The length of a borrower’s credit history is important. It’s an indication of the kind of borrower you may be in the future. In addition to the overall time an individual has had credit accounts open, credit history is also determined by how long specific types of accounts have been open, and how long it’s been since those accounts have been used. To improve credit history, get a secured credit card. Backed by a cash deposit, a secured credit card is a low-risk way for those who have not had a credit card to start building credit. Also, closing a credit card can negatively affect your score, so keep cards open. If you have cards you aren’t using, placing a small recurring charge on them, such as a phone bill, can help to keep the card active while keeping your overall credit utilization low.
Credit Mix (10%)
Credit mix is determined by looking at the types of credit you are carrying (credit cards, installment loans, mortgage loans, etc.) as well as your payment history. Your credit mix isn’t the most impactful category, and you shouldn’t pursue loans unless they make sense for your personal needs. In fact, you may already have a fair credit mix—things like credit cards, personal loans, auto loans, and mortgage loans are all considered different types of credit.
New Credit (10%)
Opening several credit accounts in a short time represents a more significant risk—especially for people who don’t have an established credit. Open new credit accounts only as needed. Every time you apply for a new credit card, this creates a hard inquiry on your credit, which automatically lowers your score. While multiple inquiries over a short time frame for credit cards may result in significant score damage, other types of inquiries—such as home or auto loans—are reported a little differently. Since lenders know people often shop around, these types of inquiries won’t hit your report for 30 days, and when they do, they’ll be counted as a singular inquiry.
Remember: Your credit score is based on patterns over time, with an emphasis on more recent information. Improving credit won’t happen overnight, but with persistence and consistency, your score should gradually improve over time!