Understanding Credit Scores and How to Improve Yours3 min read
Some simple actions you can take to increase your credit scores can make a noticeable difference, including paying bills on time, keeping credit card balances low and assessing needs vs wants.
Payment history accounts for 35% of your score. It measures how long and frequently you have been late in making bills payments as well as missed payments in recent months.
Lenders’ top concern when considering loans is repayment, so on-time bill payment history plays the most significant role in credit scoring (35% for FICO scores). Missed payments and lateness have an impactful on your score – missed ones may affect it even further!
Debt you owe and available credit both have an effect on your score, with lower balances and utilization being generally preferable. A mix of credit card and installment loan accounts tends to improve credit scores.
Your credit scores are determined by information contained in your credit reports, which can change over time. Therefore, it’s essential that you review them on a regular basis and dispute any discrepancies as soon as they appear – any mistakes left undisputed can stay on for seven years!
Credit utilization is an integral component of your credit score. Lenders look at high utilization ratios as an indicator that you may be spending more than you can afford to repay, which is why keeping your balances low and striving towards a credit utilization ratio of 30% or lower should be the goal.
The credit utilization component of your score is calculated by dividing what you owe with each card or line of credit’s total credit limit, using credit scoring models that take into account each card’s utilization rate as well as your overall utilization ratio. Note, however, that these models don’t take into account installment debt like mortgages and auto loans which impact credit scores differently than revolving credits (credit cards and lines of credit). Some card issuers offer notifications to notify when you approach your limit – although not every card issuer offers this feature!
Length of Credit History
The length of credit history is one of five elements that go into calculating your credit score, accounting for 15% of both FICO scores and VantageScores. Ultimately, longer is better in terms of higher scores; however, you do not control its length so focus on things you can control such as paying your bills on time and keeping a low utilization ratio of your credit cards instead.
Your credit history includes not only how well you’ve paid back debts and bills on time, but also public records that reflect suits, judgments, bankruptcies, foreclosures and wage attachments; as well as how diverse your account portfolio is with revolving loans as well as installment loans; FICO and VantageScore’s credit mix accounts for 10% of your score as it measures how diverse it is compared with others – this demonstrates how varied your portfolio is and may help improve scores but doesn’t always have as much effect on scores as payment history and utilization would.
Types of Credit Accounts
Credit scores are used by lenders to gauge your likelihood of repaying loans they extend you. Your payment history plays the most vital role, while factors like account mix and mix between revolving and installment accounts also impact it.
Your credit report contains both revolving and installment loans, such as mortgages, auto loans and student loans. Achieving a healthy mix between the two helps your scores.
But it isn’t just the number of accounts that matters; its how they’re managed as well. Credit utilization (the ratio between how much debt owed compared with your total available credit) accounts for 30% of your score, so keeping that low through paying down balances and keeping open accounts to a minimum are the best way to increase it. Likewise, applying for installment accounts like car loans just to increase credit mix may backfire on you in terms of scores.