What Goes Into Your Credit Score?
If you are looking for financing to buy a home, then you are well aware of how important your credit score can be. A good score can grant you access to loans and a favorable interest rate, as well as, open up many different possibilities for a healthy financial future.
But do you know how your credit score is determined? Be aware of the factors used in credit-scoring models so you can work towards achieving a higher credit score. Here are some of the top factors, according to Credit Karma:
On-Time Payment Percentage
Do you make your payments on time? The On-Time Payment Percentage is exactly like it sounds. It is the percentage of payments you’ve made on time during your credit history. This plays a big role in determining your creditworthiness, so just a couple of late payments could significantly impact your score for the worse. An easy way to avoid late payments? Set up automatic bill pay or create calendar reminders for bill due dates.
Credit Card Utilization
This is a percentage that is calculated by taking the total of your credit card balances and dividing that number by your total credit card limits. This will show creditors how much of your total available credit you are already using. The lower your credit card utilization, the higher your credit score.
Average Age of Open Credit Lines
The longer your credit history and the older your accounts the better. That’s why it’s a good idea to keep older cards open and active and to start applying for credit at a young age.
Consumers with more accounts (or more lines of credit) often have higher credit scores because it indicates that more lenders are willing to give them credit. Having a good mix of different types of credit is good for overall credit health as well. But be prudent. Only apply for credit you actually need.
When you apply for a credit card, mortgage or auto loan, a hard credit inquiry is initiated on your credit report. One hard inquiry will usually have little impact, but multiple inquiries can have a larger impact. A soft inquiry is when you check your rate to see what you qualify for. If you’re unsure, check with your potential creditor or lender before applying to see if they will do a hard or soft pull.
Derogatory marks are negative items on your credit report like collections, tax liens or bankruptcy. These records can stay on your credit report for 7 to 10 years. If you have one on your credit report, it can show a lender that you may have mismanaged your credit in the past. The best way to overcome derogatory marks is to start rebuilding healthy credit again. This will gradually weigh in your favor.
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