Your credit score will affect the possible loans you might qualify for, what the interest will be, and landlords, jobs, and insurance companies will even look at it to make decisions. Knowing what impacts your credit score can help you make smart financial choices.
Payment History
Out of all the factors that make up your credit score, payment history has the highest weight, accounting for 35% of your total score. This includes how many of your bills you have paid on time, how many you paid late, and how many you have missed, and by how much those payments are overdue.
Payment history plays a vital role in determining your score. Ali Zane, CEO of Imax Credit Repair and Identity Theft Repair Service, has seen how a single late payment can harm someone’s credit score. A missed payment can lower your score by 60 to 80 points or more, depending on how late your payment is or what your credit status is.
The upside is that the damage from late payments is not permanent; it will wear off over time. If you have a late payment from the past but have built a consistent record of paying on time, lenders will take a more positive view of your credit record. The bottom line is that you should always aim to pay at least the minimum due by the due date, without exception. Set up automated payment systems if necessary, but avoid missing a deadline at all costs.
Credit Utilization: Spending Wisely on Your Credit
Credit utilization is calculated when an individual checks their credit to view their score. It makes up about 30% of your overall FICO score and measures how responsible you are when it comes to spending your credit. Payment history and credit utilization are the two biggest factors that go hand in hand, determining the score.
Suppose a person has a total credit limit of about ten thousand dollars across all their credit cards and owes a balance of about five thousand dollars. That puts them at about a 50% credit utilization ratio. It is highly recommended that people use only 30%. People with the best credit have utilization under 10%.
Practically speaking, if your credit card has a limit of $5,000, try to maintain a credit utilization ratio of less than 30%, meaning your card balance should be less than $1,500. This gives lenders reason to believe you can manage credit responsibly, demonstrating discipline. Additionally, shielding yourself from overextending your credit proves discipline.
Length of Credit History: Building Trust Over Time
Your credit history length accounts for 15% of your FICO score and considers the average age of your accounts, the age of your oldest account, and the age of your newest account. Lenders want to see more years of responsible credit use.
It may be frustrating to try to build credit, as you may be stuck for years, but it’s a good reason to keep all of your accounts, even if you’re not using them. A common misconception is to close credit cards after paying them off, but this can shorten your average account age and is likely to hurt your credit score.
Credit Type: Showing Responsibility
Your credit mix affects 10% of your FICO score because of the different accounts you possess. Credit cards, auto loans, mortgages, and personal loans are all accounts that credit bureaus evaluate. The ability to manage various types of credit accounts is valued by lenders.
A positive credit report can be achieved by maintaining a mix of credit accounts, including both revolving and installment accounts. Do not open accounts solely to improve credit mix, as this could be detrimental, and smaller factors could become more significant.
New Credit: Avoiding Multiple Inquiries
New credit also accounts for 10% of your FICO score. When you apply for a new credit line, a hard inquiry is placed on your report, which reduces your score by a certain number of points. If you have too many hard inquiries too quickly, lenders will assume you are trying to obtain credit dangerously and will decline you for a higher risk.
Furthermore, opening many accounts in a short time reduces your average account age, which we’ve talked about as a bad thing. If you plan on applying for a large loan like a mortgage or an auto loan, try to keep other credit applications to a minimum for a couple of months before and after, as lenders will consider your credit profile more positively if you have fewer applications.
The Expert Perspective on Credit Repair and Building
Ali Zane, a credit repair specialist and the CEO of Imax Credit Repair, highlights that these criteria are only the start. His company has helped more than 36,000 people raise their credit scores to become eligible for mortgages and business loans. Zane focuses on the specific factors that affect a client’s credit score and on developing a tailored action plan for them.
Walking through credit score problems and home ownership obstacles with first-time buyers, Cody Schuiteboer, President and CEO of Best Interest Financial, knows, due to his mortgage lending experience, that borrowers’ credit score improvements are paramount to obtaining better loan provisions and interest rates. Therefore, Schuiteboer argues that payment history and credit utilization are the most important factors to address for score improvements.
In credit management, Luca Dal Zotto, an expert personal finance consultant and co-founder of Rent A Mac, believes management should not stop at the purchase of a home. Rather, the fundamentals of credit scoring, from large purchase borrowing to the many smart financial decisions available to individuals, must be addressed. He emphasizes financial management and discipline. Credit score, and to a large extent, the credit score mirrors financial performance and thus financial opportunities. Strong credit helps secure competitive mortgage rates and enables other important life goals.
Constructive Strategies to Repair Your Credit Score
Recognizing what affects your score the most, we can identify your most impactful priorities.
Focus on Payment History: This is non-negotiable if you want to build good credit; set up automatic payments for all your accounts and pay at least the minimum due.
Lower your Credit Balance: Get your credit card balances, especially the high ones, below 30% utilization, ideally below 10%.
Keep Older Accounts Open: The length of your credit history matters, so don’t close credit cards, even if you are not using them.
Space Out Credit Applications: Unless you’re looking to obtain a mortgage or an auto loan, don’t overwhelm your credit report with new accounts in a short time.
Check your Credit Reports: You are given a free credit report every year with each of the three bureaus at AnnualCreditReport.com. You can check for errors and report any discrepancies.
Understand That Credit Repair is a Slow Process: Remember, building a good credit score is not an overnight endeavor. Focusing on the most crucial factors – on-time payments and less debt – will yield positive results over the long run.
Conclusion
Many things affect a person’s credit score, but payment history and credit utilization are the most important. These two factors alone make up 65% of the FICO score. It’s important to stay on top of bills and keep credit card balances low to build and maintain strong credit.
It’s important to remember that damaged credit can be rebuilt, but that takes time and effort. Financial and credit industry professionals, including Cody Schuiteboer and Ali Zane, emphasize that the best time to work on a credit score is before obtaining a major loan or experiencing a financial crisis. Making smart credit choices today will make things easier for your future self.
