Credit score is a three-digit number that indicates your likelihood of repaying loans and make payments on time.
Having a high credit score best demonstrates that you are a responsible individual who has consistently met your financial obligations. Creditors are more confident that you will repay your future debts and it also means that businesses regard you as less of a financial risk, which indicates you’re more likely to obtain credit or pay less for it.
Credit scores are computed using a formula that considers factors such as payment history (35%), amount owned (30%), length of credit history (15%), credit mix (10%) and new credit (10%).
As it appears, your payment history is the most important factor in determining your credit scores. It accounts for 35% of your total score. This shows whether you pay your bills on time, how often you miss payments, how many days past the due date you pay your bills, and how recently payments have been missed.
The considerations include how far behind you are on a bill payment, the number of accounts with late payments, and whether or not the accounts have been brought current. The higher your percentage of on-time payments, the higher your score. Payments that are more than 30 days late will typically be reported to your lender and every time you miss a payment, your credit score suffers.
Amounts owed come second in importance to payment history when determining credit scores. In this component, credit scores focus on the current amount of debt, how much you owe on loans and credit cards, and it accounts for 30% of your score.
The credit utilization ratio is the most important factor to consider. Credit scoring models assume that borrowers who consistently spend up to or over their credit limit are a potential risk, high balances and maxed-out credit cards will lower your credit score. It is preferable to keep your utilization under 30 percent.
Length of Credit History
Responsibly managing credit accounts over time can improve your credit score, which is why you should keep your accounts open and active.
The longer of making on-time payments, the higher your credit score will be. It may appear sensible to avoid applying for credit and carrying debt, but doing so can actually harm your credit score if lenders do not have a credit history to review.
Closing a credit account, on the other hand, will diminish your overall credit, which may have a negative impact on your credit scores.
Having a variety of accounts, such as house loans, installment loans, mortgages, and retail and credit cards, can help you improve your credit scores. This accounts for 10% of your total score. Lenders prefer to see a healthy credit mix that demonstrates your ability to manage various types of credit. Both revolving and installment credit should be reflected, if possible.
Too many credit applications can indicate that you are taking on a lot of debt or that you are in financial distress. And opening a new account can have an impact on other aspects of your score, such as the average age of your accounts. Start with one credit account and go from there.