What makes up your credit score

by | Mar 5, 2020

The way your credit score is calculated, and how it’s improved, shouldn’t feel like a mystery.

Conflicting information or confusion over certain topics, however, can leave some consumers in the dark.

If you are hoping to whip your credit into shape to meet your financial goals, such as buying a home, here are some truths about how your credit score works.

First, it’s important to know that two major scoring companies, FICO and VantageScore, may take different approaches, but they are on the same page on two major factors that determine credit scores.

Payment history
Because past performance is a strong indicator of future behavior, these major credit assessors pay close attention to a borrower’s payment history.

This factor accounts for 35 percent of your credit score.

Since this portion of the credit report is so influential, it’s important for credit users to make payments on time, every time.

Even being 30 days or more late can put a serious dent in your score. Unfortunately, the damage only increases when payments are further delayed.

Autopay arrangements and calendar reminders are a great way to never let the excuse of forgetting to be a reason for not paying on time.

Credit Utilization
Credit utilization is simply the amount of credit you use out of what’s been made available.

This ratio accounts for 30 percent of your score, and the lower the credit utilization use is, the better.

Financial advisers say it’s best to use no more than 30 percent of your available credit.

Setting alerts to learn about your balance or making an extra monthly payment are great ways to keep your credit utilization in check.

Unlike late payments, catching up and improving your credit utilization is not difficult. Once you pay down high balances, the damage of a high credit utilization is removed.

Other factors
Now that you have a firm understanding of the most influential factors that make up your credit score, it’s important to learn about others that also have an impact.

The age of your credit is important, so it’s a good idea to keep older accounts open, especially if they do not carry an annual fee. You may even consider being an authorized user of an older account if it comes with a good record.

A variety of credit is also helpful. Installment accounts that have consistent amounts due (think car payment) and revolving accounts that vary in amount due each month, are the types of lines of credit you should carry.

Total balance and debt also factor in. Your goal then must be to make incremental monthly steps to pay off your debt, not add to it.

Hard inquiries, which require your consent, affect your score whereas soft inquiries will not move the needle on your credit monitor.

Also keep in mind that the use of free apps that inform you of your score will not impact you, neither will rent and utility payments.

Your credit-building goals are possible by always remembering to pay on time and by keeping balances low. Once that’s your driving philosophy, all the other credit details may fall in place, potentially putting you in a much better spot to reach your financial goals.