02 Mar What Constitutes Your Credit Score?
We all keep reading about the importance of keeping a good credit score in relation to getting good rates and getting approved for new types of credit. But what many sources fail to mention are the things that make up your credit score, which are where credit score repair tactics can go handy. Here they are.
Definitely, your payment history eats up the largest percentage of your credit score, and thus making your payments on time to your creditors have the biggest impact on your credit score. Whenever applying for a new loan or credit, the very first thing the lender or provider would like to look into is whether you have been up-to-date with your other creditors. It serves as a means for them to gauge the likeliness of you going to pay them on time or not. Needless to say, it is important to observe your due dates to keep your credit in good shape.
Your Outstanding Balance
The next biggest factor affecting your credit score is your credit utilisation, or simply the way you use up the credit limit assigned to your revolving accounts. It is shown in terms of a ratio between your credit limit and outstanding balances. The closer your balances are to your credit limits, the higher your credit utilisation is, and the more damaging it will be to your credit score.
It’s important to note that credit utilisation is examined on each of your revolving credit accounts, not as a whole. For instance, let’s say you have two credit cards. The first one has a £1000 credit limit, with a £500 outstanding balance, while the second one has a £500 credit limit with £300 outstanding balance. Even if the first card has a bigger outstanding balance on it as compared to the second card, it uses less of the credit limit assigned to it, thus a lower credit utilisation.
Age of Credit
Your credit age defines how long you’ve had experience with credit. Generally, creditors and providers favour those who have a longer credit history than those who are new to using credit. Think of it as applying for a job. Salary aside, employers are most likely to favour those applicants with lengthy and impressive work history as compared to those with limited expertise in the industry.
Because your age of credit is so important, make sure to continue using your oldest accounts, instead of closing them and opening new ones. Each time you open a new account, it will shorten your average credit age.
Variety of Your Credit Accounts
One other factor that is relevant to your credit score is your credit mix. Ideally, you should be able to handle different types of accounts, from revolving to instalment credits. It’s important to realise that keeping several credit cards, no matter if you’re always on time on your payments, will not make any huge significance since they are all types of revolving credits, and it is important to include even personal loans in the mix.
The last factor that make up your credit score are your credit inquiries. Basically, whenever you send out any new applications for loans or credit, these will be registered on your credit report as “inquiries”. Even if you didn’t necessarily qualify or pushed through with these applications, your future creditors or providers will be quite hesitant to lend you the loan or service that you need, considering that you might have had too many stuff on your plate. Additionally, some providers may view too many and too frequent inquiries as a sign of impending fraud.