The Five Categories That Shape Your Credit

The Five Categories That Shape Your Credit

There’s a lot of mystery surrounding what goes into a credit score. We are often left wondering if financial blunders from our past could limit our opportunities today and in the future. There are plenty of misconceptions out there when it comes to what does and doesn’t hurt your credit score. For instance, your account balance, employment status, or factors such as marital status have no effect on your credit score. What does impact your credit score? Take a look at the five big things that can help or hurt your credit score.

Your Payment History

Have you consistently paid your bills on time? The answer could make or break your credit score, as your payment history accounts for 35 percent of your overall score. Your history of making payments on time is considered to be the biggest predicator when it comes to your ability to make payments on time in the future. That means that you really need to avoid making late payments if you want to be able to borrow money in the future.

Credit Usage

The way that you handle the credit cards you already own influences whether or not companies can entrust you with more credit. In fact, your credit usage accounts for a whopping 30 percent of your overall credit score and will suffer if you regularly reach or get close to the limit on your credit cards. The best way to rescue your credit score if you’ve fallen into some bad habits with your credit cards is to do your best to maintain low balances going forward. One way to work toward achieving a healthier credit score is to aim for a utilization ratio of 6 percent or less. A good way to do this is to spread your balances across three cards and keep what you owe below $3,000.

The Length of Your Credit History

Opening and dumping accounts regularly can have a negative impact on your credit score. The goal here is longevity as it accounts for 15 percent of your overall credit score. Do your best to cultivate long-standing accounts with financial institutions instead of hopping from card to card or lender to lender. Clean histories are the best, so you’ll want to keep accounts open for as long as possible without missing any payments.

Credit Variety

The types of credit you have in your history can impact your score. The basic types of credit are installment loans and revolving accounts. High scores favor borrowers with both types of credit in their histories. For instance, a person with loans for assets like a car or a home and some credit cards will be in the best shape. It’s okay if you’re not at the stage yet where you’ve taken out a large loan. Credit variety only accounts for about 10 percent of your overall credit score.

Credit Inquiries and New Credit

It is not a myth that credit inquiries can impact your credit score. Your score can take a hit every time you submit an application for a loan or new credit card. That’s why it’s so important to judiciously apply for financing or credit using only a very select number of institutions during a very tight time frame. One or two pulls won’t do serious damage to your score. However, your score can dip if several inquiries are done during a short period of time. One piece of good news is that the impact of inquiries will fade completely after 24 months. It’s also important to know that soft inquiries don’t impact your credit score. Don’t forget that opening up a bunch of new credit card accounts in a short period of time can also negatively impact your credit score.

Your Score Is Always Evolving

The five categories above are what will determine if your credit score soars or plunges. Don’t be disappointed if you’re lacking in one or all of the categories. The good news is that knowing what affects your credit score is the first step to building a solid financial future. Making a commitment today to adopt the best practices for building up your credit score can help you to see an improvement in a matter of months.



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