Finance

Discrediting the Myths About Your Credit Score

Take care of your credit score health to qualify for better deals.

Don Milne Mar 1, 2018

In modern America, if you want to borrow money to buy a car or home, sign up for a credit card, get some insurance, and sometimes even apply for a job or try to rent an apartment, your credit score can make or break you.

March is National Credit Education Month, so it’s a good time to review what you know about how your actions drive your credit score.

Your credit score is determined by five factors:

35%: Your payment history.

The most important factor is paying your bills on time. If you always pay on time you are going to see your score boosted up. If you make a late payment, your score will go down. The more times you are late, the lower your score will move. And if you default on a debt, you can be sure your score will drop significantly.

30%: How much you owe.

The second most important factor measures how much you owe compared to how much you could borrow. For example, maybe you have $4,000 of credit card debt, but you have a $20,000 credit limit. You are only using 20 percent of your available credit. That is good, because it shows you qualify to use more debt, but aren’t using it. That will help your score go up.

What if you cancelled some cards you aren’t using anymore and your limit dropped to $5,000? Now you are using 80 percent of your limit. That will result in your score going down, even though you did not borrow more and your payments are on time. The model sees that you are using a high percent of your available credit and that counts against your score.

Those first two factors account for two-thirds of your credit score. Focus on these areas the most to keep your score up. Pay bills on time and don’t max out your credit.

15%: Length of credit history.

The longer it has been since you started a credit relationship, the higher your score. That means that over time your credit score will go up automatically. However, if you cancel a credit relationship that existed longer than a shorter one, your score is going to go down. This is because the model no longer sees you had this longer relationship. If you are cutting back on credit cards, your credit score is better off if you cancel a new one, not one of your older ones.

10%: New credit requests.

Going out and applying for more credit is going to result in your score going down also. This is because such action could signify that your finances are tight and you need to borrow more and the more you owe, the higher the risk it won’t all be paid back.

10%: Types of credit used.

The last thing that makes up a credit score is the mix and count of different types of credit. If you only have a couple of credit cards, your score will be lower than if you have a mix of credit cards, installment loans, and mortgages. But if you have too many, that will lower the score. Since this factor is only 10 percent, you should spend most of your efforts working on strengthening the other factors that account for most of the score.

Just like the right health actions can help you control your blood pressure and cholesterol number, taking the right financial actions can help you control your credit score number. Take care of your credit score health and you will find that you will qualify for better deals.

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