In a previous article we discussed the importance of a credit score and why keeping track of it mattered. In this article we are going to take it a step further and discuss what factors affect your score. Let’s get started.
A little recap from What is a Credit Score and Why Does it Matter?. Your credit score is mathematical data accumulated from your credit report. This data is compiled into three numbers usually ranging from 300-850 that indicates your risk level as a borrower to a potential lender. Your credit score can either send a good message to a potential lender or signal them to stay as far away as possible.
How is a Credit Score Calculated?
There are 5 major categories that make up your credit score: payment history, amounts owed, length of credit history, types of credit used, and new credit. Each category is weighted differently; some matter more than others. The data from your credit report/history is pulled into these categories and configures your score based off your financial behavior. Let’s break down the 5 categories:
Payment History – Your payment history makes up 35% of your credit score. This includes account payment information, delinquencies, and public records. When you make late payments on your credit cards, a car loan or your mortgage, it hurts your score. Late payments on installment (auto loans) and mortgage loans hurt your score the most, typically.
Amounts Owed – Amounts owed makes up 30 percent of your credit score and includes how much you owe on accounts and the amount of available credit you’re using on revolving accounts. The rule of thumb is to use no more than 30% of your total available credit per credit card and as a total percentage of all credit cards. For example if you have a credit card with a $1,000 limit, try not to owe more than $300. If you have another credit card with a $5,000 limit, try not to owe more than $1,600. In total you have $6,000 worth of credit available, keeping what you owe under $2,000.
Length of Credit History – 15 percent of your credit score is determined by how long you’ve had opened accounts and time of last account activity.Types of Credit Used – The type of accounts you have such as installment and revolving lines of credit make up 10 percent of your credit score. A “healthy” credit report will have revolving installment and mortgage debts with good payment history.
New Credit – Attempting and successfully opening new accounts also makes up 10 percent of your credit score. When you apply for new credit, those inquiries can hurt your score. Generally speaking, it is not a good idea to open several new credit accounts at one time, as this is viewed as risky by a lender and negatively affects your score.
These categories affect and determine the outcome of your credit score and being aware is the first step towards setting and achieving credit goals. For more information visit Your NC Community Credit Union online at www.nccfcu.org or stop by the Main Branch on Ash Street.
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