For most consumers, credit scores remain mystifying. They know that a higher score means that they have better credit, while a lower score makes them look riskier to lenders.
However, do you know what financial and behavioral factors influence your credit score?
It turns out that it’s a pretty complex equation with numerous factors coming into play. The more you understand about these factors, the better prepared you will be to take charge of your credit score.
The Two Most Important Factors for Your Credit Score
Which factors have the most influence on your credit score? According to VantageScore and FICO, two of America’s largest scoring companies, the two most heavily weighted factors are your payment history and your credit utilization.
Payment History
Somewhat obviously, your payment history refers to whether or not you pay your bills on time. You have lots of control over this factor simply by paying your bills when they are due. It’s critical to realize that if you are 30 days or more late with a payment, the damage to your credit score will be substantial. Make sure that you’re using auto-pay and calendar reminders to ensure that your payments are made on time.
Credit Utilization
Credit utilization refers to how much of your available credit limits you use. According to credit experts, it makes sense to use no more than approximately 30 percent of your available credit at any given time. If you want your credit score to go up, make sure that your credit utilization goes down.
Using These Factors to Build Your Credit History
Once again, you have a great deal of control over this critical factor. Resolve to use your credit cards only for emergencies. If you have high balances, try making extra payments to drive those balances down. Your credit score will rebound relatively quickly as your balances drop.
Other factors have a smaller impact on your credit score, but they can still make a difference. One of these is the length of your credit history. In general, a longer history is better, so keep old credit cards open if you can. However, it may make financial sense to close some of those older cards if they have unattractive features like an annual fee.
Other Factors Affecting Your Credit Score
A portion of your credit score also depends on your credit mix. This refers to the different types of accounts you have. For example, most people have a couple of credit cards and one or two installment loans like a car loan or a mortgage. Scoring companies like to see that you are responsibly using both types of credit.
You may notice that your credit score goes up if it’s been a while since you applied for credit. Remember that each time you apply for a loan or a credit card, it generates a hard inquiry on your credit. Each inquiry can shave a few points off your score, so apply with caution.
Scoring companies further will look at the overall picture of your debt and total balances. Essentially, they are looking to see whether or not you are making progress on paying off your debts.
When you understand the factors that influence your credit score, it becomes easier to see how you have the power to make your score go up. By paying your bills on time and taking care not to use more than about 30 percent of your available credit, you’ll see a big improvement.
