What are the biggest factors that influence your credit score? You've likely heard the term “FICO score”. This is one of the most popular types of credit scores that lenders use to decide if and how much credit to offer.
There are 5 factors that influence your score:
1) Payment History (35%) – Consistently paying creditors on time is the most important factor in determining your credit score. Even one missed payment can have an impact. Your FICO score considers the number of accounts with missed payments over the last 7 years, amounts owed on delinquent accounts, collections, and negative public record information.
2) Amounts Owed (30%) – This is more commonly referred to as "revolving utilization." This is determined by your total balance owed on your revolving accounts compared to your total credit line. Your goal should be to keep this ratio at around 30% or below. (Later, we will review some tips to keep this low)
3) Length of Credit History (15%) – The longer your credit history, the better. The age of your accounts determine your length of credit history. Your score will consider the age of your oldest credit account, the age of your newest account, and the average of all your accounts.
4) New Credit (10%) – Lenders like banks and credit card companies do hard inquiries when you apply for new credit lines or loans. These deep dives into your history are a good indicator of credit seeking activity. We recommend 0 to 1 per year and 2 at the very most per 12 month rolling period. Too many hard inquiries can lead lenders to think you might not be able to handle so much credit in so little time.
5) Credit Mix (10%) – Creditors want to know you can responsibly manage a mix of different types of credit (for more info, please check out the first blog in this series called "Credit Basics 101") such as installment loans and revolving credit accounts. Your total number of accounts may include both opened and closed accounts.
Now that you have an understanding of what the factors are that influence your score, what is considered a "good" credit score and what is considered a "bad" credit score? Below is a chart by www.myFICO.com that shows the credit score ranges, ratings, and a description of each to help you understand where your score lies.
Where do you land on this chart? Now knowing the factors that influence your credit score, what are some strategies that you can implement to improve it if you're not where you would like to be?
Every situation is different so, as always, feel free to schedule a meeting with us if you need additional guidance.
Stay well,
Alex