When it comes to taking out loans or renting an apartment, the process can be easy or difficult largely depending upon your credit score. Most people have at least heard of credit scores before, but many don’t understand how they are calculated or how to raise a credit score moving forward. Learn more about the five factors that determine your credit score below.
1. Length of Credit History
How long you have had a history of credit is one major factor in determining your credit score. People who have a long history of reliably making bill payments on time enjoy much higher scores than those who have just entered the world of credit. Many young people, and those who are just getting a credit card or loan for the first time, have to deal with poor or average credit scores for at least a few years until their credit history is more established.
2. Debt or Loans
The second-largest factor for credit scores is how much debt you have. All of your loan or debt accounts get added to form a total amount of debt, and this is compared to the amount of credit you have available to you. When you have high amounts of debt, your credit score suffers, but you can fight back by paying bills on time or by paying more than is due each month. You can even pay credit card bills more frequently, such as weekly or biweekly, to keep lower credit card balances, which can help your score over time too.
As you get closer to paying off debts, your credit score may also get higher, especially if you have established a long history of credit by that point.
3. Payment History
Payment history is the largest factor that comes into play when a credit score is calculated. If you frequently miss payments or pay bills when they are way past due, your credit score drops. Even if you miss just one payment a few times per year, your score won’t be as high as it could be.
Fortunately, you can raise your credit score back up by paying bills on time, every time, for a prolonged period of time. A higher proportion of timely payments results in a higher score.
4. Types of Accounts You Have
When people have several types of credit instead of just one or two, they are likely to see a higher credit score. If multiple agencies receive payments from you on time on a regular basis, it establishes more credibility on your part and raises your score. Examples of credit accounts can include credit cards, student loans, car loans, home loans, and more.
5. Recent Activity
What you have done lately, credit-wise, plays a small part in determining your credit score. Every time you apply for a new credit card or have opened a new account, your score may take a temporary ding. Opening several new accounts in a short span of time can also allude to financial difficulties, and this can lower your score.
Having a long relationship with the same loans and credit cards instead of opening new ones all the time significantly helps your score.
The Importance of a Good Credit Score
Having a good credit score can help you get lower interest rates on loans and better car insurance rates, and increase your chances of landing your dream apartment. Having poor credit scores makes lenders less likely to take a chance on you, and you can pay dearly for it with higher interest rates and apartment rejections.
By understanding the factors that make up your credit score, you become empowered to take steps toward improving your score over time.