5 key things about credit scores, how to improve them
What's the story
Though understanding credit scores can be quite confusing, they remain an integral part of one's financial health.
A credit score is basically a number that represents how creditworthy you are; it determines whether you would get a loan and at what interest rate.
Here are five things you need to know about credit scores to manage and improve yours effectively.
History
Payment history matters most
Did you know payment history comprises 35% of your credit score? It is the biggest factor.
Paying bills on time consistently shows lenders you're reliable. Even a single missed payment can hurt your score for years.
Automatic payments or reminders can help you pay on time and keep your payment history clean, and improve your overall score.
Limit spending
Keep credit utilization low
Credit utilization is the percentage of credit at your disposal that you use at any given time.
Ideally, you should keep this ratio below 30%. High utilization indicates potential financial stress and could bring your score down.
Tracking your spending regularly and paying off balances on time can keep your utilization low, which reflects positively on your credit profile.
Duration
Length of credit history counts
The length of time you've had active credit accounts makes up around 15% of your overall score.
Longer histories usually show stability and experience with managing debt responsibly.
Don't close old accounts even if they're not in use; keep them open with the occasional activity to prolong the average age of accounts on record.
Diversification
Diversify your credit mix
Diversifying your credit with installment loans, revolving accounts like credit cards, and retail accounts can boost your score.
The variety shows lenders that you're capable of managing different types of debt responsibly.
Such diversity in your credit portfolio constitutes around 10% of the scoring model adopted by major credit bureaus, emphasizing its importance in determining your creditworthiness.
Limit inquiries
Limit new credit inquiries
Each new application for credit leads to an inquiry on your report, which can pull scores down by a few points per inquiry temporarily if done too frequently (typically within six months).
Limiting applications only as necessary protects you from unnecessary dips, while keeping long-term growth potential intact across all aspects considered during periodic evaluations throughout life stages.