Get Smart About Your Credit Score

A good, strong credit score typically unlocks lower interest rates and a higher likelihood of lenders extending credit to you. In the United States 90% of all lending decisions use the traditional FICO model for credit scores. Although a majority of the algorithms used to calculate scores are a closely guarded secret, FICO has made five main components that make up your credit score public knowledge.

1. Payment History – 35%

This carries the most weight of the factors. It is crucial that you pay bills and loan payments on time, not allowing items to become late and sent to collections. Payments are usually considered late and sent to credit bureaus after 30 days of no payment.

2. Utilization – 30%

The second largest weight of your score, utilization looks at how much of your available credit you are currently using. Ideally you should never carry balances on your credit card that are more than 30% of your credit limit. Higher than 30% balance and it could start to affect your score negatively.

3. Length of Credit History – 15%

If you haven’t had credit for long, ensure you have good payment history and utilization to make up for your lack of longevity. If you have a long credit history, avoid closing out credit cards even if you don’t use them anymore as it will affect your credit positively to show no balance on an available credit card.

4. Recent Activity – 10%

Opening multiple accounts at once (typically in a 3-6 month time frame) can negatively impact your score. It can also make creditors wary to lend to you, as it can indicate financial trouble. When rate shopping for a new loan each inquiry will show individually on your credit report but credit bureaus take this into account and count these inquiries as one when calculating your score.

5. Credit Mix – 10%

It’s good to have a variety of credit lines to show potential lenders that you can manage different kinds of debt.

Remember that nothing on your credit report is permanent. Late payments and prior collections will eventually fall off, although typically staying on your report for up to seven years. By focusing on these five factors going forward, you will see a positive impact on your credit score in the future!