What Impacts Your Credit Score?
Let’s take it a step back.
What is a credit score?
A credit score is your credit worthiness in a number format. It’s comprised of several factors; factors in which we will dive into.
This post is about what impacts your credit score.
Let’s dive into the top 5 factors of what impacts your credit score.
1. Payment History
Do you pay your credit card bill in full, every single month? If it’s anything but yes, this is a factor to improve on. This is because the payment history has a huge influence on determining your credit score. It reflects whether payments are made on time, late payments, and any delinquencies. Delinquencies include whether any amounts ultimately made it to collections. This is not a situation you want to be in, as it will tank your credit score.
2. Credit Utilization Ratio
A credit utilization ratio is how much of your available credit you’re using. It’s a simple equation: amount of your total balance divided by your total credit card limit. Typically, you want to be below 30% utilization. So if you see yourself constantly exceeding 30%, you’re either using too much credit or your total credit card limit is not high enough or reflective of your financial situation. If it’s the latter, fortunately, you can reach out to your credit card company and ask them to raise your limit. Depending on your financial situation (income to debt ratio), they could raise your limit.
3. Length of Credit History
The length of credit history means how long you’ve had your oldest credit accounts as well as the average age of your accounts. This includes all of your debts. The longer the history, the better. This is where some say if you have a credit card you’ve had for a very long time, does not cost you anything to keep (i.e. no annual fees), it’s much more beneficial to keep it open than to close it.
This is also something to keep in mind when you’re considering opening a new line of credit, especially when you see yourself purchasing a house in the next year. This is because a new line of credit will reduce the average age of your accounts; therefore, potentially reducing your credit score. With a lower credit score, this could impact the interest rate of your mortgage if you’re borrowing money to purchase a home; therefore, costing you much more in the long-term. So, if you can wait until after your home purchase to open the credit card, that would be something to consider.
4. Credit Mix
Lenders like to see your ability to hold and responsibly handle different types of credit. That being said, if you have a good variety of different accounts, this can be beneficial to your credit score. For example, different mixes include credit cards, student loans, mortgages, car loans, and other lines of credit.
5. Derogatory Marks
Derogatory marks will impact your credit score negatively. They include events like collections, bankruptcies, foreclosures, and liens. Essentially, it’s showing the lender that you have a difficult time paying back the loans taken out; marking you as a higher level of credit risk. That being said, it could be quite challenging to borrow more money in the future, as these marks could stay on your credit for several years. Therefore, it is advisable to prevent these marks from going on your record in the first place.
To reiterate, the top 5 factors that impacts your credit score are:
- Payment History
- Credit Utilization Ratio
- Length of Credit History
- Credit Mix
- Derogatory Marks
There you have it! Interested in learning more buying house fees? Check this post out for the top 7 buying house fees.
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