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Your credit score plays an important role in your financial condition. It can affect your ability to get credit cards, rent an apartment, qualify for a mortgage, or even get a job. Your FICO score is made up of five different factors: payment history, amount of debt, length of credit history, new credit accounts, and the types of credit used.
In this 2nd post of our credit repair series, we’ll discuss each of these factors in detail and explain how you can improve your credit score!
What is a Credit Score?
Your credit score is a three-digit number that reflects your creditworthiness. It’s based on information in your credit report, which is a record of your borrowing and repayment history. Lenders use your credit score to help decide whether to lend you money and at what interest rate.
Factors That Impact Your FICO Score
FICO scores are determined on the following five factors:
Factor # One: Payment History
Payment history is the top of the list for a reason. It’s the most important factor that determines FICO scores. It makes up 35% of your credit score and includes all of your credit accounts, whether you’ve paid on time or not. Late payments can stay on your credit report for up to seven years!
If you’ve missed a few payments in the past though, don’t worry! You can still improve your score by catching up on your payments and maintaining a good payment history going forward.
Factor # Two: Amount of Debt
Your amount of debt also plays a great role in how low or how high your FICO score will be. It makes up 30% of your credit score and includes both your total credit limit and the amount you owe on your credit cards.
If you’re carrying a lot of debt, try to pay it down as quickly as possible. You should also avoid opening new credit card accounts if you’re struggling to make payments on your current ones.
Factor # Three: Length of Credit History
Next, is the length of your credit history. It makes up 15% of your FICO score and includes the age of all of your credit accounts and how often you used them.
You can improve your score by maintaining an old credit account and using it frequently. Just be sure to pay off the full balance each month. You can also build a good credit history by opening new accounts and using them responsibly.
Factor # Four: New Credit Accounts
The fourth most important factor in your FICO score is new credit accounts. It makes up ten percent of your score and includes how many new credit accounts you opened recently.
If you are planning to open a new credit account, be sure to do it responsibly. Don’t apply for too many cards at once and make sure you can afford to repay the debt.
Factor # Five: Types of Credit Used
The fifth most important factor in your FICO score is the types of credit used. It makes up ten percent of your score and includes both installment loans and revolving lines of credit.
You can improve your score by using a variety of different types of credit products. This shows lenders you can handle different types of debt responsibly.
The Two Types of Debt That Affect FICO Scores
In general, credit files contain two types of debt: installment and revolving credit.
An installment debt is a loan you repay in fixed monthly payments over a predetermined period of time. An example of an installment loan would be a car loan or a mortgage.
Revolving credit is a line of credit that allows you to borrow up to a certain limit and then pay the balance back down over time. Credit cards are the most common type of revolving credit.
Account Types That Affect Credit Scores
There are five types of credit accounts that can affect your FICO score:
- Credit Cards
- Student Loans
- Car Loans
- Personal Loans
A credit card is a type of revolving line of credit. It allows you to borrow money up to your limit, and you must pay it back each month. Credit cards are considered high-risk loans, so they typically have a higher interest rate than other types of loans.
A mortgage is a type of installment loan. It is a loan used to purchase a home or property. Mortgages usually have a lower interest rate than other types of loans, and the repayment terms are longer.
A student loan is a type of installment loan. It is a loan used to pay for education expenses, such as tuition and books. Student loans typically have a lower interest rate than other types of loans, and the repayment terms are longer.
A car loan is a type of installment loan. It is a loan used to purchase a car or vehicle. Car loans usually have a lower interest rate than other types of loans, and the repayment terms are shorter.
A personal loan is a type of unsecured loan. It is a loan that does not require any collateral, such as a home or car. Personal loans typically have a higher interest rate than other types of loans, and the repayment terms are shorter.
What Can Damage your FICO Score?
There are several things that can damage your FICO score. Let’s discuss each one below.
- Missed payments – One of the biggest things that can damage your credit score is missed payments. If you miss a payment on a loan or credit card, it will affect your score negatively.
- High debt levels – Another thing that can hurt your credit score is high debt levels. If you have too much debt compared to your available credit, it will lower your score.
- Too many new accounts – Another thing that can hurt your score is opening too many new accounts in a short period of time. This makes lenders think you are desperate for credit and maybe a riskier borrower.
- Credit utilization – The fifth thing that affects your FICO score is how much of your available credit you are using. If you use a lot of your available credit, it will lower your credit score.
- Default accounts – If you have an account that is in default, it will damage your credit score. A default account is one that you have failed to make a payment on for at least 90 days. Examples of these are foreclosure, bankruptcy, repossession, charge-offs, and settled accounts.
How to Improve Your Credit Score
There are five ways to improve your credit score:
- Pay your bills on time – The easiest way to improve your credit score is to simply pay your bills on time. This shows lenders that you are responsible and can handle debt responsibly.
- Keep your debt levels low – Another easy way to improve your score is to keep your debt levels low. Try not to borrow more money than you can afford to repay each month.
- Don’t open too many new accounts at once – Another thing you can do to improve your score is not open too many new accounts at once. Lenders may see this as a sign of financial instability.
- Use less of your available credit – The fourth thing you can do to improve your score is use less of your available credit. Try not to use more than 30% of your total limit, and even less if you can.
- Have a good credit history – The fifth and final way to improve your score is to have a good credit history. This means always paying your bills on time and not borrowing more money than you can afford to repay.
- Pay any outstanding balances – Another way to improve your credit score is to pay any outstanding balances. This will show lenders that you are serious about improving your credit and are willing to take action.
- Dispute errors on your credit report – Finally, if you think there are errors on your credit report, you can dispute them. This will help improve your score because it shows lenders that you are taking steps to improve your credit.
This webinar provides a more detailed look at credit repair than we have time to go into today, so you may want to check it out for a little more information on specific steps you can take yourself:
Your FICO credit score reflects your overall risk as a borrower. Lenders look at all five factors when making their decision, so it’s important to understand them all! This makes credit score checking an important task that you as a borrower should pay attention to. By understanding how your score is calculated, you can take steps to reach a good credit score and make life easier for yourself financially. Thanks for reading and stay on the lookout for the next articles in our credit repair series!