In today’s world, it’s really important to know about the factors influencing credit score. Think of credit scores like a report card for how you handle money. Knowing about these factors could help you make smart choices and have a good money future.
If you are not very versed with credit scores, your can check out this guide to understanding it.
In this article, we’ll talk about the main things that can make your credit score go up or down and why they’re important for any country’s money system. Now let’s look at 5 common factors that could affect your credit score:
5 factors Influencing Credit Score
1. Payment History: A Big Part of Your Credit Score (35% of the FICO Score)
Your credit score is a number that tells people how good you are at borrowing money and paying it back. “Payment History” is a huge part of this score. It checks if you’ve been paying your bills on time.
So How does Payment History affect your credit score?
- Paying your bills when they’re due is great for your credit score. It’s like a thumbs-up, showing you’re responsible with money.
- However, if you miss payments or are late, it can hurt your score. Think of it like a game where you lose points for making mistakes.
- Also, if you make a mistake now, it has a bigger effect than mistakes you made a long time ago. So it’s always good to stay on top of your payments.
2. Credit Utilization Rate: How Much of Your Credit Card Limit You Use (30% of the FICO Score)
Imagine you have a bucket, and this bucket represents the maximum amount of money your credit card lets you spend (this is called your credit limit). The Credit Utilization Rate is like checking how much water (or money) you’ve filled into this bucket compared to its total size. If your bucket is overflowing, it means you’re using too much of your credit card limit.
How does credit utilization impact your credit score?
- Keeping your bucket only partly filled (using less than 30% of your credit limit) shows that you’re careful with your spending. Credit agencies, the groups that decide your credit score, really like this because it shows you’re not spending more than you should.
- On the other hand, if your bucket is nearly full or overflowing (using a lot of your credit limit), it can be a warning sign. It might make people think you’re having money troubles or not managing your spending well.
3. Length of Credit History: How Long You’ve Been Borrowing Money (15% of the FICO Score)
The length of credit history is like a timer that started running when you first got a credit card or borrowed money. Just like someone might ask, “How long have you been playing soccer?” or “When did you start learning the piano?”, this is asking, “How long have you been using credit?” This timer doesn’t just look at your oldest account, but it also takes into account all the times you’ve borrowed money and finds an average.
Impacts of Length of Credit History on your credit score
- Having a long history of borrowing and paying back money is a good thing. It’s like having a long friendship; over time, people get to know you better and trust you more. In the same way, credit agencies trust you more when they see you’ve been managing your money well for a long time.
- If you’re new and just started borrowing money (like getting your first credit card), your score might be a bit lower. It’s not because you’ve done anything wrong; it’s just that credit agencies are still getting to know you. As time goes on and you show you’re responsible, your score can improve.
Related Article: 10 ways to improve your credit score.
4. Types of Credit in Use: Showcasing the Variety in Your Credit World (10% of the FICO Score)
The “Types of Credit in Use” is like looking at the different tools in a toolkit. Just as a toolkit might have hammers, screwdrivers, and pliers, you could have different types of credit accounts, like credit cards, home loans (called mortgages), and store accounts. This factor checks how many and what kinds of credit tools you have and how well you use them.
How does this Influence your credit score?
- Having a good mix of credit types is one of the significant factors influencing credit score. It highlights your capability to manage different financial responsibilities, akin to someone proficient in using a variety of tools.
- However, simply gathering various types of credit without thoughtful management might not be beneficial. While “Types of Credit in Use” is an essential aspect among the factors influencing credit score, it’s crucial to remember that it’s not just about having many accounts but about using them intelligently.
5. New Credit Inquiries: Are You Frequently Knocking on the Credit Door? (10% of the FICO Score)
Every time you try to borrow money or get a new credit card, it’s like knocking on a door asking for permission. The “New Credit Inquiries” section counts these knocks. It’s one of the factors influencing credit score that looks at how often you’re reaching out for new credit opportunities in recent times.
Impact of New Credit inquiry on your score
- Frequently knocking in a short span can make it seem like you’re in urgent need of money. This frequent knocking is one of the factors influencing credit score, and doing it too much can decrease your score, especially if you’re new to borrowing.
- But remember, not every knock counts the same. When you check your own score or if an employer does it as part of a job process, it doesn’t negatively impact your score. These are like silent knocks that don’t affect your credit standing.
Besides these major 5 factors influencing credit score, there are other factors like Debt Consolidation. Check out this article on “how Debt Consolidation can affect your credit score“. This can be a helpful tool if you use it wisely. It’s like tidying up: it can make things easier to manage, but you have to make sure not to create new messes.
Debt Consolidation can also have both positive and negative effects on your credit score, depending on how you handle the process and what you do afterward. Always think carefully and perhaps consult with a financial expert before making big decisions.
Conclusion
As we wrap up our chat about the factors affecting your credit score, remember that everyone’s credit story is a bit different. While we’ve talked about the general rules, each person might see some differences based on their own money habits. And even though there are many ways to calculate a credit score, the FICO Score is like the main rulebook most people use.
Also read this article on “Seven Credit Score Landmines That Could be Hurting Your Credit“.
To sum it up, knowing and using these factors influencing credit score wisely is super important. It’s not just about making our own money life better. When we all have good credit, it helps the whole country’s economy stay strong and healthy.
