Do You Know The Components of Your Credit Score?

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Many times when we apply for credit, whether it’s for a credit card, auto loan or mortgage we really do not really understand what makes up our credit score. Most lenders will determine whether to extend credit based on your FICO score and at a certain interest rate. So it is very important for us to understand the components of a credit score so we can achieve the highest score possible so that we can get the best rate. I hope the following will help you get a better understanding of each component of a credit score.

  • Payment History

Your payment history comprises 35 percent of the total credit score and the most important factor in calculating credit scores. According to FICO, past long-term behavior is used to forecast future long-term behavior. FICO keeps an eye on both revolving loans – such as credit cards – and installment loans, such as mortgages or student loans. One of the best ways for borrowers to improve their credit score as a whole is by making consistent, timely payments.

  • Credit Utilization

Credit Utilization is the percentage of available credit that has been borrowed – makes up 30 percent of your total credit score. FICO views borrowers who habitually max out credit cards – or who get very close to their credit limit – as people who cannot handle debt responsibly. So it is very important to keep your credit card balances low as possible. FICO says that people that have the best scores tend to have an average credit utilization ratio of less than 6 percent, with three accounts carrying balances and less than $3000 owed on revolving

  • Length of Credit History

The length of time each account has been open and the length of time since the account’s most recent action – is 15 percent of your total credit score. A longer credit history provides more information and offers a better picture of long-term financial behavior. Those who do not have a long credit history can have a great FICO score if they have no missed payments and low utilization rates.

  • New Credit

New Credit accounts for 10 percent of your total FICO credit score. But this doesn’t mean that opening multiple credit lines at the same time will improve your score. In fact, such behavior could suggest you are in financial trouble by needing significant access to lots of credit. People with no credit cards tend to be viewed as higher risk than people who have managed credit cards responsibly

  • Credit Mix

Credit Mix makes up the last 10 percent of your score.  While this is somewhat of a vague category, but experts say that repaying a variety of debt products indicates the borrower can handle all sorts of credit. According to FICO, historical data indicates that borrowers with a good mix of revolving credit and installment loans generally represent less risk for lenders.

As you see, the first two factors make up nearly two-thirds of your score. So, if you pay your bills on time and don’t carry big balances, you’re two-thirds of the way toward a good credit score.

Before you apply for credit, I recommend that you get a free copy of your credit profile. You can get free copy of your credit profile from annualcreditreport.com

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https://www.amazon.com/s?k=faithful+finances+forever&i=stripbooks&crid=1RHKT3UF9FKYK&sprefix=faithful+finances+forever

103 thoughts on “Do You Know The Components of Your Credit Score?”

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