Breaking down your credit...

What Influences Your Credit Score?

Your credit report is similar to a financial report card. It serves as a way for banks, insurance and lending companies to determine if you’re likely to miss payments or default on a loan. It’s also common for landlords, employers, and government agencies to check your credit before confirming a transaction. By understanding where the numbers on your credit report are coming from and how they impact your overall score, you can make better financial decisions to improve your credit worthiness.

While there are many variables that go into calculating your credit score, here are the five most important components:

Payment History: 35%
Paying your bills on time doesn’t only help you avoid late fees; it also helps your credit. A good payment history shows lenders you have a long record of on time on time bill payment. Late or missing payments negatively affect your score, as do any collections, foreclosures, or bankruptcy. Payment history usually pulls the most weight in your credit score calculation, so it’s important to stay current in this category.

Level of Debt: 30%
Don’t use up all your credit. Being very close to your credit limit impacts your score negatively. A good policy is to keep your credit card balance within 30 percent of your limit – so if your credit card limit is $5,000, charging more than $1,500 can be risky even if you pay of the balance on time. Keeping your debt low shows lenders that you’re able to afford monthly payments.

Length of Credit History: 15%
How well have you managed your credit accounts over time? Having a longer credit history helps your score. Lenders want to see that you’ve kept a good track record over a long period because someone with little or no credit history is more financially risky.

New Credit: 10%
Having lots of credit inquiries within a short time lowers your score because it shows you’re actively searching for more credit, which makes lenders nervous. However, inquiries for your own credit report, by unsolicited lenders, or by an employer don’t impact your score.

Types of Credit: 10%
Showing that you have a record of paying different types of debt helps your credit score. A healthy mix of credit includes credit cards, home loans, and auto loans. Credit consisting of only one type, such as credit card accounts, can hurt your score, so diversity is important when it comes to credit accounts.

The major components of your credit score consist of your payment history and amount of debt. By knowing how the items in your credit report are weighted, you’ll have a better idea of how you can improve it.