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The Five Elements of a Credit Score

[Friday, November 28th, 2014]

Having a good credit score is essential for so many things: getting a low interest rate on your mortgage, credit card, or car loan, being approved for the best rewards credit cards, even getting a job or an apartment.

But what really goes into your credit score? Why is your score good, bad, or average? Here’s a look at the five elements that go into making your credit score.

1 – Payment history. This is the biggest factor that decides whether your credit score will qualify you for the very best interest rates and all the other things you’d like to buy, have, or borrow. Thirty-five percent of your credit score is determined by your payment history. That means if you’ve missed payments, been consistently late on payments, or paid less than the minimum due, your credit score could be negatively impacted in a major way. It’s vital that you always pay your bills on time. That includes the minimum amount due on your credit cards, as well as your utility bills, mortgage payments, installment loans, and any other debts.

2 – Credit utilization. This represents 30% of your credit score, and it simply means the amount of your credit line that is in use. If you have a credit card with a limit of $10,000 and you are carrying a balance of $9,000, you have a high rate of credit utilization, which has a negative effect on your credit score. Remember this: the higher your credit utilization rate, the lower your credit score. Try to keep your balances at less than 30% of your available credit, at the very most. Ten percent or lower is even better.

3 – Length of credit history. How long you’ve had a credit card, mortgage, or other loan counts for 15% of your credit score. This is one you may feel that you can’t do much about; after all, if you’ve just graduated from college and are young, you won’t have a very long credit history. However, if you open a line of credit as soon as you turn 21 (or sooner if you have a parent who will co-sign for you) and use credit continuously and responsibly, you will build a nice long credit history. It’s important not to close credit accounts for this reason. That student credit card you’ve had since you were young is a good one to hang on to, even if you feel you’ve outgrown it.

4 – New credit. Ten percent of your score is made up of how much new credit you have. Opening a lot of credit cards in a short amount of time doesn’t look great on your credit score; credit lines with some history are better as noted above.

5 – Mix of credit. The last 10% of your score is influenced by what types of credit you have. Potential lenders will look more favorably on you if you have some variety in your mix of credit types. Carrying an installment loan or mortgage in addition to a regular credit card helps your credit score shine.


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