Your credit score is incredibly important. It can affect your ability to get a loan, your interest rates, and even your ability to rent an apartment. Your credit score is calculated based on several different factors, including your payment history, the amount of debt you owe, and your credit utilization ratio. In this blog post, we will discuss what affects your credit score and how you can improve it!
What is a credit score and how is it calculated?
A credit score is a number ranging from 300 to 850 that reflects the likelihood of someone repaying their debts. It’s calculated by looking at your credit history and activity, such as how long you’ve been borrowing money and what types of loans or accounts you have. The more responsible you are with managing your finances and paying off what you owe, the higher your credit score will be.
There are several factors that affect your credit score:
1. Payment History
Your payment history makes up the largest part of a credit score calculation – 35%. Creditors look at whether or not borrowers have had any missed payments, late payments, collections accounts, bankruptcies, or other instances where they failed to meet their obligations in past credit accounts.
2. Credit Utilization
This is the amount of credit you are using compared to what you have available. Creditors look at what percentage of your available credit limit you are currently using and factor that into their calculation – 30%. For example, if you have two credit cards with a total combined limit of $1,000, and you’re currently using $500, then your utilization rate would be 50%, which could impact your score negatively.
3. Length of Credit History
This shows how long your accounts have been open and active – 15%. The longer it’s been since you opened an account or loan product, the more positively it can affect your overall score.
How to improve your credit score?
Improving your credit score is essential for financial success. Credit scores determine what type of loan interest rates you will get and what type of credit limits you are eligible for. Knowing what affects your credit score can help you make decisions that will boost your score and improve the overall health of your finances.
Payment History: Your payment history is one of the most important factors impacting a credit score — accounting for 35% of the total rating. This means it’s critical to pay bills on time or even in advance if possible. It’s also important to avoid any delinquencies on credit accounts.
Amount Owed: This makes up 30% of your credit score and includes the amount due on all outstanding debt and what percentage of your available credit limit is being used. It’s best to keep balances as low as possible, along with having a variety of loans or accounts to spread out what you owe.