Your credit score is a powerful number that can affect your life now and in the future. In some ways that you might not even imagine. Your score determines interest rates you pay for credit cards and loans and helps lenders decide whether you even get approved for those credit cards and loans in the first place.
Unexpected businesses, such as insurance companies, have started to use credit scores to make decisions about you. Utility companies check your credit before establishing new service in your name, and some employers check your credit history (but not your actual credit score) to decide whether to give you a job, a raise, or promotion.
Protecting and building your credit is more important than ever, and how you handle the following five factors can make all the difference in determining your credit score.
1. Payment history. Payment history is the most important ingredient in credit scoring, and even one missed payment can have a negative impact on your score. Lenders want to be sure that you will pay back your debt, and on time, when they are considering you for new credit.
2. Credit utilization. Your credit utilization ratio is calculated by dividing the total revolving credit you are currently using by the total of all your revolving credit limits. This ratio looks at how much of your available credit you’re utilizing and can give a snapshot of how reliant you are on non-cash funds. Using more than 30% of your available credit is a negative to creditors.
3. Credit history length. How long you’ve held credit accounts makes up 15% of your FICO Score. This includes the age of your oldest credit account, the age of your newest credit account and the average age of all your accounts. Generally, the longer your credit history, the higher your credit scores.
4. Credit mix. People with top credit scores often carry a diverse portfolio of credit accounts, which might include a car loan, credit card, student loan, mortgage or other credit products. Credit scoring models consider the types of accounts and how many of each you have as an indication of how well you manage a wide range of credit products. Credit mix accounts for 10% of your FICO Score.
5. New credit. The number of credit accounts you’ve recently opened, as well as the number of hard inquiries lenders make when you apply for credit, accounts for 10% of your FICO Score. Too many accounts or inquiries can indicate increased risk, and as such can hurt your credit score.