The 5 Biggest Factors That Affect Your Credit

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Do You Know Which 5 Things Count Most When It Comes To Your Credit Score?

A credit score is just three digits — but their importance can really add up over time. A good score informs lenders that you should be considered for a car loan, a mortgage, or even business financing. What’s more, a good score suggests to a landlord that you’re a safe bet as a tenant who can be relied upon to pay the monthly rent. And another bonus: A good score means you could be approved for a credit card — and even determine your interest rate.

How is a credit score tabulated? In short, credit scores use information contained in credit reports to determine a score. Typically, five credit reports factors are considered when determining a credit score.

1. Payment History

Payment history carries the most weight in a credit report. Period. That’s why it’s essential that you make each and every credit payment on time. Think one late payment won’t be noticed or make a difference? Think again: Even one late payment has a negative impact on your report, and the delinquency could stay on your record for up to seven years.

2. Credit History

Although it seems financially smart, you might want to put the brakes on closing an existing account after you’ve made the very last payment. Truth is, lenders prefer doing business with borrowers who have successful experience with credit. FICO factors in the average age across all your accounts and the age of the oldest one. Provided you haven’t been delinquent on any accounts, maintaining long-term relationships with creditors improves your credit score.

3. Credit Utilization

Don’t overlook the importance of your debt-to-credit ratio, which compares how much credit you’re actually using to how much you have available. To calculate your ratio, add up all your owed balances, then add up all your spending limits. When you divide the balances total by the spending limits, you get your utilization rate. On average, ratios above 30% are not looked upon favorably and could hurt your credit score.

4. Credit Mix

It’s great that you’re able to manage credit card payments for your favorite clothing boutique or vegan supermarket, but lenders like to see that you can manage a range of different accounts responsibly. A well-balanced credit mix might could include a home mortgage, a personal loan, a car loan, and two or three credit cards.

5. New Credit

Compared to payment history and credit history, new credit is considered less important when it comes to determining your credit score, but it’s worth noting that it can either help or hurt your score. Opening a new account can raise the amount of credit you have at your disposal while at the same time helping to hold down your credit utilization. But before you fill out a stack of credit applications and submit them all at once, know that some lenders might view this type of activity as a red flag that indicates you’ve lost a job and need a line of credit, that you’re spending beyond your means, or that you’re not managing your finances in a sustainable way.

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Sandra Murphy

Sandra Murphy

Holds a master's degree in professional writing and has more than 15 years of experience writing for national and international entities.

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