What Makes Up Your Credit Score?

Why do we have credit scores? What makes up your credit score? Did you know 56% of Americans have bad credit?

Credit scores were implemented to determine the creditworthiness of a borrower. The higher the credit score, the more likely the consumer will pay his or her bills on time. While the most important piece of your credit score can be paying on time, there are several other factors that play a role in determining your score as well.

Payment History 35%

When it comes to determining your credit score, the biggest piece of the puzzle is your payment history. What this means is you have to stay current on your accounts and pay on time. If your forgetting to make payments, set reminders for yourself or enroll in autopay. Just 1 missed payment can drop your credit score 100 points or more and take a long time to recover.

If you’re having trouble making payments, consider contacting the lender or switching to 0% balance transfer cards. 0% balance transfer cards will transfer your balance and allow you to make payments with no interest for a set period of time. You’ll be surprised how quickly you can pay off accounts when interest isn’t accruing.

Amounts Owed 30%

Don’t max out! Maxing out your credit cards is not good for a number of reasons. Maxed out cards with ensure that you are paying the maximum amount of interest possible. When you get to this point, climbing out of debt can feel like climbing Mt Everest. Making minimum payments will only pay off the interest, leaving you in limbo. It’s also noteworthy to say that consumers with maxed out cards have an average credit score of 563.

On the flipside, not using your credit cards will also hurt your credit score. You want to use them, but not overuse them. Pay your accounts down to 20% of the credit limit or lower. Doing so will give you a quick boost in score. Always try to remain below 20% of your limit. Once you pass the 20% threshold your score will start to decline.

Another method to raise your credit score would be to ask the creditor for an increase in your credit line. Increasing your credit line will see the utilization ratio drop, bringing your closer to 20% or lower and increasing your credit score.

Length of Credit History 15%

I see it all the time, clients call in wondering why their credit score had dropped. They just got a new credit card and closed their old one. Not a good idea. Old credit cards are not like old appliances. The older your card, the more impact it has on your score. Closing old accounts will almost always bring your score down.

If your old card has outrageous annual fees or super high interest rates, then you may want to think about closing them up. Before you do, call your credit card company and ask if they can waive the fee or reduce your interest rate. If they refuse to budge, then you may want to make the moves to close your account.

Variety of Credit 10%

Consumers with the highest credit scores have them because they have a variety of credit. There are 2 types of credit: Installment loans set at a fixed rate which are your mortgages, auto loans and student loans to name a few, and revolving credit which are your credit cards.

It’s always a good idea to have a few different accounts open on your credit report, including a few different credit cards. Doing so will spread out your utilization and make it easier to maintain a good score.

New Credit 10%

New credit can happen any time you apply for a new loan or account. When your credit score is pulled an inquiry is created. Inquiries will shave off a few points from your score and affect your credit for about 1 year (although they can report for 2 years.) Inquiries have strength in numbers and can really bring your score down if you’re constantly pulling your credit throughout the year. So make sure to keep a watchful eye on your inquiries.

If you are struggling with bad credit and would like a free consultation with an expect, please fill out the form below and we’ll be happy to point your credit in the right direction (up!)

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