A credit score is a financial measure that analyzes your financial history and lets lenders know how likely you are to pay them back. Credit scores range from 300 to 850, The higher the number the better the score. In addition, having a high score gives you a better chance of being approved for a new loan or a new line of credit.
So, what affects your credit score?
Payment History – Whether you pay on time or late is the most important factor as it accounts for 35% of your credit score. Lenders want to make sure that you will be able to pay off your debt and on time. Even one missed payment can have a negative impact on your credit score for years to come.
Amount Owed – The amount of debt that you owe is the second biggest factor for your credit score as it accounts for 30% of your credit score. Creditors recommend staying below 30% of your available credit to have a healthy credit utilization ratio.
Length of Credit history– How long you’ve had a line of credit makes up 15% of your credit score. It accounts for all lines of credit from the first one to the most recent. Typically, the longer your credit history, the higher your score is.
Different types of credit – Having debt is one thing, but the type of debt that you have is also important. 10% of your credit score is determined by the diversity of your credit debt. Such as credit cards, student loans, or car loans. In other words, for a higher score, it’s best not to put all of your eggs in one basket.
New Credit – Opening new lines of credit accounts for 10% of your credit score. If you open too many new lines of credit it will increase the risk of you not paying off your debt on time which is a red flag for lenders.
This is why your credit score is important and what affects it. If you plan on financing an asset in the future, knowing where your credit stands and how to improve it will make a great difference in the rates available to you and your negotiating power.