In honor of Credit Education Month, it’s a great time to discuss the topic of credit scores and its complexities. Even though it’s commonly thought of as an uninteresting thing to spend time on, this 3-digit number influences every aspect of everyday life, from housing to purchasing a vehicle. And according to Experian, for the first time, there are more Americans with very high scores (Super Prime) than very low scores (Deep Subprime). Checking your credit score can be a fairly simple process, but what exactly determines how your score is calculated? Let’s break down the top 5 factors that come into play when calculating your credit score.
Your Payment History
Your payment history is as crucial to your credit score as brushing your teeth is for your dental health. Although it’s easier said than done, your payment history and whether you pay your bills on time or not each month is the biggest factor in determining 35% of your credit score. Your payment history for the products or services you purchase is the biggest factor in predicting your trustworthiness for credit in the future. Paying your bills on time should be a top priority, and it looks like many Americans are putting this habit into practice since there are more consumers with very high scores as compared to very low ones.
Your Utilization Rate
How much you utilize your current credit limits, or your utilization rate makes up 30% of your credit score, making it the second most important factor when it comes to calculating your credit health. In general, consumers with zero late payments and low utilization rates are those with the best credit. But how can one calculate their utilization rate? You simply add up all of your existing credit balances as well as all of your credit limits and divide your total balances by your total limits. Consumers with the highest credit scores have rates less than 10%, meaning they don’t use more than 10% of their credit limits. However, the industry recommendation is to not exceed 30% of your limit.
Age of Credit Lines
Creditors want to know that you are and have been a trust-worthy consumer for some time. The longer your credit history, the better. That’s why when it comes to calculating your credit score, the average age of all your credit lines including open credit cards, student loans, mortgages, and auto loans are combined to find an average. A long credit history is a sign that you can successfully manage credit and helps creditors perceive you as less of a risk, since it helps them assess your trust-worthiness. Your age of credit lines makes up about 15% of your credit score.
Credit Types/ Total Accounts
The type of credit you take on can also affect your credit score even if it doesn't affect it as much as payment history or your utilization rate. This factor only accounts for 10% of your credit score. Nevertheless, this factor usually looks at the number of credit lines that you have, as well as the types of credit you use. You can improve your credit worthiness by showing that you can manage different types of credit. It can be anything from a mortgage to installment loans.
Credit Inquiries
A credit inquiry happens when a business requests to check your credit and assess credit-worthiness. Multiple credit inquiries can hurt your credit score and knock it down. Creditors and businesses want to be sure that you’re not overextending yourself with credit. So when it comes to applying for credit, it’s not a good idea to put several credit applications in one after another. Each hard inquiry will hurt your credit health and will take some time to build your credit back up.
Did you know that your credit score can even affect your car insurance rates? Make sure you’re paying a fair insurance rate when driving your vehicle. Call an Infinity agent at 1-800-INFINITY or get an online quote today.