Several factors affect your credit scores, in particular punctual payments and the number of credit limits you use.
Your credit scores are determined by several factors, such as whether you pay bills on time and how long you have taken out loans. Understanding which factors affect credit scores helps you plan the most effective way to build up or protect your credit.
Credit scoring companies calculate your scores from data in your credit reports. Although they do not disclose their exact formulas, they share the basic ingredients they use to calculate scores.
Why do you care? Because your credit often holds the key to other parts of your life: whether you can get a credit card or car loan, and at what interest rate; whether you can buy a house or rent the apartment you want; even how much you pay for car insurance and utility deposits.
The Factors That Affect Credit Scores Most
Payment history and credit utilization, the percentage of the credit limits you actually use, make up more than half of your credit scores. Focus your attention mainly on these two while keeping an eye on the other factors.
Your credit reports reveal your payment history, or whether you have consistently paid bills and other obligations on time. According to FICO, 35% of your score is related to the payment history.
What to do: Pay all your bills on time. Paying bills late by 30 days or more can dent your score – and the later you pay, the greater the damage. Set Autopay or calendar reminders so you don’t miss due dates. You could also ask creditors to move your due dates so they better adjust to the time you get paid.
The amount of credit limit you use is expressed as a percentage, called credit utilization.
What to do: Experts recommend not using any more than 30% of your available credit. People with the highest scores tend to use much less than that. To keep your credit utilization low, you can set up things like balance alerts or make additional payments during the month.
The good news is that high loan-to-value ratios can reverse the damage caused by high loan-to-value ratios (LIBOR), and once you have paid off a large outstanding debt, the lender notifies you that the damage has been recouped.
Other Credit Factors You Should Know
Once you have paid on time and kept credit utilization low, turn your attention to other credit factors. These also affect your score, though not nearly as much:
The Length of The Credit Term: Longer is better, so keep old accounts open unless there is a compelling reason to close them, such as an annual fee on a card you no longer use. Maybe you can help yourself in this category a little by becoming an authorized user on an old account with an excellent balance of payments.
What Kind of Credit You Have, or Credit Mix: The best is a mix of installment accounts – those with a certain number of equal payments such as car loans or mortgages – and credit card accounts.
The Time Since You Applied For New Credit: Any application that causes a hard query of your credit can take a few points off you.
Total Balances and Debts: It is best if you make progress in repaying your debts.
Factors That Do Not Affect Your Credit Score
Checking Your Own Score: If you receive your own score through your bank or free credit score service, this will not affect your score. This is because checking your own score is considered a soft pull on your credit. You can check it as often as you like without affecting your score.
Rental Payments and Incidental Expenses: In most cases, your rental payments and incidental expenses are not reported to the credit bureaus, so they do not count towards your score. Except, if you use a rent-reporting service or if you are in arrears with incidental expenses payments, the utility company may bill or sell them to a collector, who may report them to the credit bureaus and hurt your score. Some new products, such as Experian Boost, allow you to add incidental expenses information to your Experian credit report that can affect your credit.
Income and Bank Balance: While credit reports contain some employer information. They are only used to assign account details to the right person. An increase will not boost your score. And, since reports only list credit accounts — not savings, checking accounts, or investment accounts — your balances in them will not help increase your score either.
How To Use Your Newfound Knowledge
Credit scoring companies check your credit reports to see how you are on all of these factors. Then, they create your scores from that data. You can see the same things they do by checking your credit reports.
Focus your credit build efforts on making on-time payments and keeping credit balances low compared to credit limits. These factors have the greatest impact on your score.