Your credit score is a significant factor in life, whether we like it or not. The credit score you have affected the financial options available to you and the cost of these options. Banks and financial institutions use your credit score to make decisions such as approval of personal loans, credit cards, mortgages, car loans, and much more. Even service companies like water and electricity review your credit record before providing their services.
Credit scores are reported by three credit bureaus in the United States (Transunion, Equifax, and Experian). Each bureau measures the scores distinctly, but the standard scale is 300 to 850, with 850 being the best possible credit score. Having a good score (more than 650) will make your life easier in more ways than you can imagine. The most significant help points that affect your credit are:
- Financing interest: the better your credit is, the lower the interest.
- Amounts of financing: the better your credit is, the higher the loan amounts.
- Financing deadlines: the better your credit is, the more time they give you to repay your debt.
I think you understand the point. Your credit score is of the utmost importance. For this reason, it is so vital to review your credit and understand it. We write this article to explain the factors that affect your score and what you can do to fix your credit.
5 Factors That Affect Your Credit Score
- Your payment history: Your payment history is one factor that most influences your credit score since it counts for 35% of your score. Payment history refers to how long you pay your bills. If you have stopped paying bills, suffered repossessions, bankruptcy, or something similar, this can dramatically hurt your credit score for 7 to 15 years. So, the best thing you can do for your credit score is to pay on time every month without exception.
Tip: Pay on time whenever you can and the total amounts you owe if possible. Suppose you have had an emergency that does not allow you to pay on time or the full amount. In that case, we recommend you call your creditor as soon as possible and request an extension of payment since sometimes they allow special arrangements for extreme cases.
- Your level of debt and use of credit: Your level of debt is the second factor that most affects your credit score since it counts for 30% of your score. Your level of debt is the total sum of all amounts not paid in your name (personal loans, mortgages, credit cards, etc.). Your credit usage is the% you use of your credit limit. For example: if your credit card has a limit of $ 1000 and you use $ 800 of that card every month, your credit usage is 80%.
Tip: To improve your debt level, try to pay all the debts you can and not to borrow more than what you need. If your debts are too high, you can also look for debt consolidation programs that help you lower the interest you are paying, which will help reduce your debt and the time it would take to pay it. Do not spend more than 30% of your credit limit to improve your credit usage. If you need to use more than 30% of your card, you can take out other credit cards to distribute your expenses among different cards to avoid using more than 30% of the limit of a single card.
- The age of your credit record: The age of your credit record counts for 15% of your credit score. Having open accounts for longer is better for your history because it shows that you have more experience with your finances. You are more “predictable” than someone with a newer record and without much information.
Tip: Try not to close accounts like your credit cards unless necessary.
- The type and number of credit accounts you have: The type of accounts you have affects 10% of your credit score. By having more accounts and different types, you show that you have experience managing several different types of credits simultaneously. The two most common types of credit accounts are a) revolving credit accounts (such as credit cards) and b) installment loan accounts.
Having or having both accounts help improve this section of your credit score.
Tip: Since this section does not affect your credit as much, we recommend you have different credit cards instead of taking out a loan in installments if you do not need it. We also do not recommend you take out many accounts or credit cards, and much less in a short time of opening another account since this can negatively affect your credit score.
- The number and type of reviews of your credit: This section counts for 10% of your credit score. Each time you apply for loans or accounts that require a “strong credit check,” these reviews deduct some scoring points, although there are not many. By completing many applications and in a short time, these points are added and can significantly impact your credit. Reviewing your credit and applying to accounts that do “soft credit reviews” do not affect your credit because they do not review credit bureau information directly.
Tip: Normally, there are 2 “strong credit reviews” per year, more than that and in less time can impact your credit. Do not apply to more accounts than necessary or no more than 2 or 3 a year to avoid this. You can also prevent this damage to your credit by applying for accounts that do “soft credit reviews” which do not harm your score.
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