In order to make the most of your credit score, it is important to know how your credit score is calculated. In 2009, dramatic changes were made to what makes up a credit score. While one’s credit score is a multi-faceted number which can be affected by a variety of things, the following are the five major components of what makes up your credit score, followed by some tips and tricks on how you can boost your credit score and recover from past financial mistakes which could otherwise negatively impact your future.
Although paying on time can be the difference between an exceptional and mediocre credit score, one slip up won’t hurt as much as it did prior to 2009. If you have a relatively good history of making payments on time, with only a few mistakes few and far between, your credit score won’t be affected as much as it used to be. Regardless, making payments on time is crucial, and late payments should be avoided as often as possible.
Amount Borrows Vs. Available Credit:
The amount of credit you owe in relation to your available balances has always been a crucial number. Make sure you don’t borrow more than 50 percent of your available credit from one specific lender. Ideally, you want to borrow about 33 percent of your available balances; anything above 33 percent should be avoided. It is better to owe a small amount on a few cards than to max out one card.
Length of Credit History
Individuals with a credit score which exceeds 800 usually hold at least three credit cards. These credit cards stereotypically hold low balances and have been open for seven years each. Instead of closing an account, it is better to work toward paying it off and keeping it open with a small amount of activity which can be paid off each month. Opening new accounts only to close them a few years later is one of the quickest ways to give yourself a bad credit rating.
Inquiries & New Debt
Inquiries and new debt account for about ten percent of your total score. The good news is a credit score does not have as much an impact as it did pre-2009. All mortgage inquiries within thirty days of each other will be considered as one “inquiry,” and all auto inquiries within fourteen days will be considered as one “inquiry” as well. So do your best to plan accordingly!
Types of Debt
Last, but not least, different types of debt can have different effects on your overall credit. It is a better idea to have installment credit, like auto loans, than it is to have revolving debt, like credit cards. When faced with the option between loans and credit debt, one should always choose loans. Additionally, the 2009 change now gives you points for being able to successfully manage multiple types of debt.
If you’ve found yourself with a disagreeable credit score, there are a number of things you can do to positively impact your credit score. By adding an installment loan to the mix or gradually paying down your credit cards, you can see a gradual increase in your credit score. By using cards lightly and checking your limits, you can keep your credit score stable, and by dusting off an old card and keeping it active, the credit card issuers won’t close your account. By keeping all these under consideration, you’ll be on your way to increasing your credit score and leading a healthy and strong financial life. If you aren’t sure of the state of your credit score, feel free to use our free credit score estimator!